The market volatility we have had over the past number of months has created a lot of interesting opportunities for investors. There are a number of stocks trading for below liquidation value in industries ranging from healthcare to technology to retail have increased. Usually these companies are non-profitable, but the significant upside offered to investors from their most liquid assets, makes them compelling opportunities. Two of those companies are Smith Micro Software (SMSI) and Opnext (OPXT).
Smith Micro provides software solutions that simplify, secure and enhance the mobile experience. Its portfolio of products and services spans Connectivity Management, Communications and Content Management solutions. Smith Micro’s solutions include client and server software applications used by the world’s leading wireless operators, device manufacturers and enterprises. The company has shipped over 100 million copies of its QuickLink family of products to its customers worldwide.
SMSI was profitable as recently as 4Q10, but has fallen on hard times this year. The company has struggled as there continues to be a decline in its base connection management business, primarily due to the transition to mobile hotspot technologies as a growing way to connect to mobile broadband networks. For 3Q11, Smith Micro saw revenues fall 63% y/y and gross profit fall 71% y/y. In addition, SMSI recorded an impairment charge of $112.9 million to its goodwill and long-lived assets.
The market has punished the stock and it is down over 90% just in 2011. However, now the stock is trading at such low levels that its current assets, adjusted for liquidation values, while taking into account its liabilities, provides upside from today’s levels of nearly 50%. The company also has patents and other intangible assets that have been fully written off but may still have some value. Smith Micro Software’s management also thinks the stock is undervalued at current levels. On November 2, the company announced a share repurchase program of up to 5 million shares, which is roughly 14% of shares outstanding.
Opnext is one of the world’s leading designers and manufacturers of optical components for the data and telecommunications industries. Opnext's current products include state of the art laser diodes, transmitters and receivers for networks operating at speeds up to OC-192/STM-64 which are sold to the world's major telecommunications and data communications and industrial equipment manufacturers. Partners in Opnext include Marubeni Group. Opnext has major backers in Hitachi (HIT) and Clarity Partners, a private equity firm.
Opnext was established in September 2000, created from the resources of the Fiber Optic Components Business Unit at Hitachi and funded by the Clarity Group. The company continues to enjoy the full support of Hitachi's R&D efforts, including the Central Research Laboratory, Mechanical Engineering Research Laboratory, and Production Engineering Research Laboratory.
The company has had a rough second half of the year so far as reduced demand for 40G line-side modules and subsystems limited revenue in the September quarter. Opnext has also been impacted by the flooding in Thailand. Opnext’s primary contract manufacturer, Fabrinet, announced that, as of October 22, 2011, flood waters had infiltrated the offices and manufacturing floor space at its Chokchai campus in Pathum Thani, Thailand, where it manufactures certain of Opnext’s products. Fabrinet said that it is unlikely that production at Chokchai will resume before the end of the calendar year. Opnext said that it expects that the loss of revenue in the quarter ending December 31 will be material.
However, not all of the news is bad. As with SMSI, the market has punished OPXT to very depressed levels. OPXT now is trading at a price to sales multiple of just 0.26 and a price to book multiple of 0.42. Adjusting Opnext’s inventories, accounts receivable, and its property, plant and equipment for liquidation values, leads to upside of roughly 40%, netting out all liabilities.