The stock market is capable of many curious things. One of them surely is the existence of companies that can be bought for less than their net cash in the bank. This seems akin to buying a checking account at a discount and getting a business thrown in for free.
In such cases, investors are not only implicitly saying that the associated enterprise is worthless, but that it actually destroys value and should be worth less than zero. This seems absurd at first glance. Upon closer consideration, however, valuing an enterprise at less than zero makes sense if the company is losing money and appears likely to keep burning through the cash in the bank. By the time shareholders get their hands on the cash, there might be little or none of it left.
We recently screened for companies selling for less than net cash. The conclusion was obvious: Many of the companies on the list are destroyers of value. They are either burning through a lot of cash each quarter, or they are controlled by self-serving management, or both. Buying into such companies seems to be an exercise in futility. The only gain we can envision from such a purchase would be in a commodity all investors seem to accumulate over time -- experience.
Looking through the list of companies trading at negative enterprise values, we did find a handful of interesting companies that deserve a closer look. In at least a couple of cases, it seems that the associated enterprises could actually be worth a substantial amount of money. They may be left for dead today but have an opportunity to rise again in the future.
For an example of this phenomenon, consider IDT Corporation (IDT), Howard Jonas's mini-conglomerate, which was selling for less than net cash in late 2008. Fast-forward to today and you would be sitting on a 25-bagger had you bought IDT at the lows of 2008. We are not arguing that the following companies will generate anywhere near this type of performance. Rather, we simply point out that the market occasionally gets it very, very wrong, creating an opportunity for investors who are not afraid to go against the grain.
Here are five interesting companies trading at negative enterprise values:
BroadVision (BVSN) ($12 per share; market value (MV) $56 million; enterprise value (EV) -$5.0 million), based in Redwood City, CA, provides software that helps companies run web initiatives that feature personalization and self-service, modular applications and toolsets. Customers use BroadVision software to create e-commerce, portal solutions, and enterprise social networks. The company has 500 licensees, including Epson, Fiat (OTCPK:FIATY), Iberia, Sony (SNE), U.S. Navy, Vodafone (VOD) and Xerox (XRX).
BroadVision was once a "dot com" highflier but fell off the map along with the bursting of the Internet bubble in 2000. Unearned revenue rose 16% from $2.0 at the end of 2009 to $2.3 at yearend 2010. The company has $61 million of net cash (109% of recent market value) and $54 million of tangible book value.
Gencor Industries (GENC) ($7.70 per share; MV $74 million; EV -$10 million), based in Orlando, FL, manufactures heavy machinery used to produce highway construction materials, synthetic fuels, and environmental control equipment. The company’s products, which are made in two facilities in the U.S., include asphalt plants, combustion systems, and fluid heat transfer systems.
The operating loss dropped 36% from $4.8 million in the fiscal year ended September 30, 2009 to $3.0 million in FY10, while revenue decreased 2% during the same period. The company has $84 million of net cash (113% of market value) and $102 million of tangible book value. Gencor has a high-return business, with a seven-year average return on equity of 25%.
Gravity (GRVY) ($1.70 per share; MV $49 million; EV -$10 million), based in Seoul, South Korea, develops online games that are primarily distributed in Japan, Southeast Asia, Brazil, and Russia. The company recently offered nine proprietary online games and had two online games in development.
Gravity's most popular game, Ragnarok Online, has been on the market for most of the past decade. The sequel, Ragnarok Online 2, has been in development for several years and has been plagued by release delays. The highly anticipated game is now in beta testing and may be released in Q4 2011, creating a major potential catalyst for Gravity's revenue and earnings growth.
Net income dropped 44% from $6.1 million in 2009 to $3.4 million in 2010, while revenue declined 9% in the period. The company has $59 million of net cash (121% of market value) and $44 million of tangible book value.
GigaMedia (GIGM) ($1.30 per share; MV $71 million; EV -$2.2 million), based in Taipei, Taiwan, provides a suite of online games in Greater China and Southeast Asia. The company's reported revenue has plummeted recently because of a legal dispute with the chief executive of China-based affiliate T2CN. GigaMedia has written down the investment to zero, suggesting that the balance sheet offers real value even if the company cannot reclaim its stake in T2CN. GigaMedia also owns 40% of Mangas Everest, an online poker company.
Shareholders' equity rose 18% from $185 million at the end of 2008 to $218 million at yearend 2009. The company has $74 million of net cash (105% of recent market value) and $174 million of tangible book value.
In a recent corporate update, GigaMedia said 1) it had approved an $11 million stock buyback; 2) management was planning to sell "certain game developer investments in 2011 to realize gains and crystallize value on GigaMedia's balance sheet"; and 3) the company was "positioned for upside potential" from its 40% stake in Mangas Everest.
Management has provided the following guidance for Q2 2011:
...in line with seasonal trends following the traditionally strong Chinese New Year holiday, management anticipates a quarterly sequential decrease in revenues. Management also expects a decrease in operating expenses resulting from ongoing cost control initiatives.
Peerless Systems (PRLS) ($3.50 per share; MV $12 million; EV -$1.0 million), based in El Segundo, CA, historically licensed imaging and networking technologies to the digital document markets. In 2008, the company sold its imaging and networking technology assets to Kyocera (KYO)-Mita. Peerless retains some license rights and is seeking to maximize the value of the licensing business, perhaps through a sale.
The company is led by value investor Tim Brog, who owns 16% of the equity. In a sign of strategic transformation, Peerless announced in June 2011 the launched of investment advisory firm Locksmith Capital Advisors and the Peerless Value Opportunity Fund, a publicly traded fund with an activist value investing mandate.
Gross margin fell 28% from $6.0 million in the fiscal year ended January 31, 2010 to $4.3 million in FY11, while revenue rose 29% during the period. The company has $13 million of net cash (108% of recent market value) and $12 million of tangible book value.
Disclosure: I am long GRVY, GIGM.