We have profiled many companies with significant off-balance sheet liabilities (most notably operating leases) which cause the company to be a likely value trap. Sometimes, to the joy of a value investor, substantial assets exist that go unreported entirely from the balance sheet.
Consider Aetrium Inc (ATRM), a designer, manufacturer and marketer of electromechanical equipment for handling and testing integrated circuits. The company has been recently beaten down due to substantially lower guidance for Q4, the consequence of a particular client extending its evaluation period into Q1 of 2011. ATRM now trades in the low $2 range which is approximately 25% below where it has been trading for most of 2010, and only slightly above its $1.75 NCAV.
As mentioned, ATRM has significant off balance sheet assets, in the form of deferred tax assets. The company accrued nearly $26m worth of DTAs over the past few years, and showing management’s conservative nature, took a valuation allowance equal to the full amount. This means that you won’t find a DTA anywhere on its balance sheet, but as the company earns profits, it will recognize gains from income tax benefits.
Shortly after the company took these valuation allowances, the company returned to profitability (albeit, in a meagre manner so far). It would seem that a full write-down of the DTAs is excessive, and so we can make an adjustment for what we expect that asset to be worth today. Perhaps 20% of the value will be realized (you’ll have to make your own assessments of the company’s future profitability), which would add $5.2m to the company’s assets, equal to about $0.48 per share. Not bad for a stock trading in the low $2 range.
It pays to investigate the notes to a company’s financial statements, as there can be some overlooked value available for the diligent analyst.
Disclosure: No position.