TAT Technologies: Assets Are Looking Good

TAT Technologies Ltd (Nasdaq:TATTF) is an Israeli-incorporated company that manufactures, sells and services a broad range of heat transfer components that are used in both commercial and military aircraft internationally. The company is operating in the small cap aerospace and defense sector and as indicated here, is currently trading at a heavy price discount to book value of 56%.

When looking at P/B ratios as value indicators, it's important to follow up the analysis by actually looking at the quality of the assets on the balance sheet. It's also prudent to understand the earnings power of the company to determine if future heavy operating losses are going to deteriorate the balance sheet significantly. For TAT Technologies, I analyzed the company assets and took a very conservative view by considering their liquidation asset value to establish a value floor for the stock.

The results are in the table 1 below, but I will annotate a few comments here. First, cash and marketable securities are taken at par since they are extremely liquid (what is more liquid than cash?). Even though accounts receivable already has an allowance built in for doubtful accounts, I took 70% of that value to be more accurate of what could occur in a liquidation event. There was around 158 days inventory on the books and it was largely made up of work in progress, spare parts and raw material. I discounted inventory (which is already at lower of cost or market) to 60% of its carrying value.

Land is often on the books at a discount to current values (since land generally appreciates) so my further discount to 80% of book value is definitely not taking a rosy view of things. I completely wrote off the goodwill and intangibles from the balance sheet, since if you assume that a liquidation event will occur, there is a good chance most of this value is going to vanish faster than a free cup of coffee at MBA school!

Table 1: Net liquidation value of assets and writedown factors

I took at par value all the balance sheet liabilities, minority interest and added in the "off balance" sheet operating lease. I used a present value formula to approximate the operating lease liability. The written down value of assets minus the liabilities yields a liquidation value of ~ $48 million dollars for the shareholders. Considering the dilution effect of stock options and the current shares outstanding, the final liquidation value (assuming no transactional fees) is around $6.87 per share.

The last closing price for TAT Technologies was $5.57 on the Nasdaq and this represents a 19% discount to the estimated liquidation value of the assets. If TAT Technologies is going to continue operating as a going concern, the value of their assets is very likely going to exceed this liquidation value calculation and makes the stock price look even cheaper.

Disclosure: None

Comments

[Jake T:]

I like what you've done here and respect your methodology.
Here's a hypothetical/rhetorica... question for you: If you bought at $5.57 and it went to $6.87 within a year, would you sell?

2008 Aug 02 02:07 PM

[Reyer:]

Hi Jake,

All other things equal, if I owned the company (I'm considering it) I wouldn't sell all the position at the liquidation value. The reason is I don't think they are going out of business.

If I thought the company was going to continue operating, i would sell it closer to the intrinsic value which in this case I believe is at least a couple of dollars higher than the liquidation value!

You have to make a judgement call on that. I personally think they are going to continue operating.

cheers,
Reyer

2008 Aug 02 06:51 PM

[Jake T:]

Hi Reyer,
I agree, they seem to have value as a going concern above liquidation (positive EBIT for last 9 years!).
I'm not so much worried about them going out of business as I am falling prey to a take-under or some other shenanigans. Maybe I'm just a novice, but the organization and ownership described in the 20F of the various companies orbiting TATTF are pretty confusing. Buffett says that if you can't understand a 10k, it's because management doesn't want you to. I haven't dug deep enough yet to make a judgment either way, but until then, it's staying in my "too hard pile".
Best,
Jake

2008 Aug 13 08:24 PM