Astrotech - A Hedge Against Terror, 50% To 80% Undervalued

| About: Astrotech Corporation (ASTC)

Summary

ASTC was recently awarded a Department of Homeland Security (DHS) contract to develop next generation explosives trace detection systems.

ASTC closed on 3/22 at $1.97. Credibly valued by principal in firm owning 13.6% of ASTC at $4.05 to $11.95 per share.

ASTC is currently selling at roughly 1.5 times cash (after March collection of $6.1 million indemnification holdback) with no debt.

8-figure intellectual property investment - expensed, not reflected on balance sheet.

ASTC may be held as a hedge against market downturns due to terrorist-related activities.

On March 9, Astrotech (NASDAQCM: ASTC) announced that its 1st Detect subsidiary and Smiths Detection (a subsidiary of U.K.-based Smiths Group) had been awarded a contract to develop next generation explosives trace detection systems for the Department of Homeland Security Science and Technology Directorate using 1st Detect's chemical analyzer technology.

Despite Oliver Davies being a principal with Huckleberry Investments (which owns 13.6% of Astrotech's common stock), his recent Seeking Alpha article was instrumental in moving my opinion on ASTC from bullish to raging bullish. Aside from the thoroughness of his analysis, his responsiveness to comments made by those with opposing views was quite impressive - especially given that the commenters had more than passing familiarity with the chemical sensor business (i.e. the focus of ASTC's 1st Detect subsidiary).

This morning's tragic bombings in Brussels are, unfortunately, likely to be repeated elsewhere in the future. Thomas Friedman of the New York Times observed today on CNBC Squawk Box that jihadists might well engage in terrorist acts in an attempt to influence U.S. elections. He theorized that such acts would inure to the benefit of the Trump campaign, in that voters would become more likely to favor Trump's hard line stance on Muslim immigration. He also reasoned that jihadists would welcome a Trump presidency, in that policies perceived as anti-Muslim would serve to unite the Muslim world against non-Muslims.

This led me to take a closer look at ASTC, given its involvement in explosives detection, as well as to read the Davies article. Though the figures developed therein are subject to a great deal of uncertainty, ASTC looks like a bargain even if one shaves a significant amount from his most pessimistic case.

His most significant conclusion is that the 1st Detect business alone is worth between $2.60 and $10.50 per share to ASTC ($53.8 million to $217.3 million). If one were to value ASTC's businesses and assets other than the company's $30 million or so in cash at zero, this would imply an ASTC valuation of between $4.05 and $11.95 per share. Again, his article was commented on by informed critics, but none of them took issue with the specifics of its valuation methodology.

In doing my own due diligence, I found additional reasons to be bullish on ASTC:

* Tom Pickens, the CEO, owns over 4 million shares - roughly 20% of the company - and he has sold only 51,544 shares since April 2015.

* Other insiders own roughly 4 million shares in total, but none of them have sold any of their ASTC since last April.

* As of 12/9/15, the company had repurchased almost 1% of its outstanding shares at an average price of $2.62.

* ASTC's Astral Images subsidiary is doing somevery cool things in the area of film digitization, repair, and archiving, the value of which is likely to grow apace with increasing adoption of 4K Ultra High Definition television.

* Though the great majority of the company's (roughly) $2.5 million per quarter cash burn is treated as an expense for accounting purposes, these outlays (and tens of millions in the past) have led to the creation of valuable intellectual property that is not reflected on ASTC's balance sheet.

*Safran's intent to sell its Morpho subsidiary suggests that R&D activities at Morpho may be slowed. Morpho and Smiths Detection are currently the two world leaders in the explosives trace detection market, but both are selling Ion-Mobility Spectrometry machines, a technology inadequate to meet DHS needs. Thus, the next generation devices being built to meet DHS specs by ASTC and Smiths are likely to enjoy a particularly strong competitive position if Morpho falls behind.

From a portfolio management point of view, ASTC has some rare attributes that may come in handy. It can be an effective hedge against terrorist-related market downturns. In addition, there are very few businesses with which its fortunes are directly correlated, making it a useful diversification tool.

The one potential negative I found was that its Astrogenetix subsidiary doesn't seem to be doing much. The last news item on its website dates back to 2012. I saw a silver lining to this possible dark cloud, though, which was that ASTC seems to be more about steak than sizzle. Personally, I'd much rather see a company prioritizing the operation of its business, rather than wasting resources in manufacturing news to boost its stock price.

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Disclosure: I am/we are long ASTC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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