Communications Systems: One Cheap Stock

I am looking at Communication Systems (JCS) and this is one cheap, attractive stock. The caveat is the stock is quite small and rather thinly traded so keep that in mind.

JCS is engaged through its Suttle business unit in the manufacture and sale of modular connecting and wiring devices for voice and data communications, digital subscriber line filters, structured wiring systems and through its Transition Networks business unit the manufacture of media and rate conversion products for telecommunications networks.

The company is actually the largest supplier of voice connectors to the world's largest telcos. I like that as a growth story. And I like the growth potential from a rebound in technology spending.

But the real value I see here is the tremendous amount of cash the firm generates. The 4.5% dividend is one indication of the cash generation, the other is the $30M of cash they have sitting on the books. With a market cap of $95M and Net Current Assets of roughly $60M I am looking at one cheap stock.

To put it another way, this company is selling at a mere 58% premium to its cash value. That is almost unheard of for a company that is not in financial distress. I plan to dig a bit more but for now I think I need to put a starter position on ASAP!

Comments

[Positive NPV]

I suggest focusing most intently on the potential for growth, because if the future looks flat for them, then the price is currently priced about right. The FCF for the firm for the last three years has been flat yet steady. As a quick valuation, use $4.5mm as a FCF number. Assume that grows at 2% per year, which seems reasonable in a flat growth valuation scenario. Assume an equity cost of capital of 10%. Assume the stream lasts forever. Using a basic perpetuity valuation you get a NPV of the FCF streem of $56.25 mm. Add on the excess cash and you've got a firm that is probably fairly valued if the future for them is flat to mildly up.

For there to be upside on this one, growth in FCF will need to happen. If in your digging you see strong evidence of growth prospects, I'd like to hear about it. It could be a great play with lots of current safety.