When stocks start trading below the cash the company has on hand, it's usually a sure sign that it is in what is perceived to be a terrible business. Potential investors dismiss the company under the impression that it will surely burn through the cash eventually. That certainly seems to be the case with the following two companies whose share price has declined under their cash per share, so we will take a closer look at both of them to see if there is any value left in either business.
Gencor Industries - Filling Potholes With Cash?
The first company that qualifies is Gencor Industries (GENC), a producer of the machinery that is used to produce road construction materials such as asphalt. This business has plodded along at roughly breakeven earnings and cash flow for the last several years, with earnings finally seeming to pick up a bit over the the last three quarters, with 13 cents a share in net income for the three months ended June 30, and 51 cents a share for the past nine months.
Normally, earnings like this would be unremarkable, since they result in a trailing P/E of 10 -- about what one would expect for a stodgy industrial company with no growth. However, it becomes a much more enticing value proposition when you consider that you can currently get the business for free. At the end of the last quarter, the company had $87M in cash and marketable securities against less than $11M in total liabilities. This works out to net cash of almost exactly $8 a share, versus the current share price of around $7.
This obviously sounds too good to be true, so you might assume the company is burning through cash or its business might suddenly dry up. On the contrary, it is cash flow positive, adding $9M to its cash stash over the past nine months. Furthermore, it would be expected to benefit from the additional business prospects a recent highway bill might bring, something astutely pointed out in this article. I consider the chance to essentially get paid to own a profitable business with intriguing growth prospects not too good to be true, but rather, too good to pass up.
Rimage Corp. - Buyer's Remorse?
The second company to consider, Rimage Corp. (RIMG), is a bit trickier to analyze. This stems from the fact that the company realized its traditional business of DVD publishing systems was a declining industry, and decided to make an acquisition in the rapidly growing enterprise video communications market with the purchase of Qumu, a leading business video platform provider.
However, the purchase price of $50M was considered to be steep, especially given that Qumu only had several million in revenues. Those fears have turned out to be well founded, with the company basically already admitting that it overpaid for Qumu with the impairment charges it took in the most recent quarter to eliminate all goodwill on the balance sheet, resulting in a horrendous quarterly loss of over $4 a share.
Adding insult to injury, the company also decided to eliminate its dividend, instead focusing on an increased share buyback. All this negative news, coupled with the fact that the acquisition was already largely seen as a value destroying desperation move from the beginning, has caused the company to trade all the way down to the cash it currently has even after paying for the acquisition.
Current shareholders certainly must despise the decision, but I don't think that should necessarily discourage new shareholders from buying into the company since, instead of paying a similarly high price, they are now actually getting the acquisition for free. If management is eventually proven right and Qumu revenues begin growing fast enough to offset declining disk publishing revenues, earnings could eventually follow, accelerated by the share buyback.
Although the performance of the company after the acquisition has been dreadful so far, current shareholders have unfortunately borne the brunt of the pain, setting the stage for daring buyers to be able to benefit from what management still believes will be a transformational acquisition, as evidenced by not only the company buyback, but also other recent insider buying as well. I would consider joining them if the company continues trading below its cash value, even as revenues from Qumu continue to grow.