Special Situati...'s  Instablog

I just got done reading several sell-side reports post fiscal quarter ended July 2012 and they all seem to have a common theme, which is:

The Company generates very healthy cash flow ($500-$700 million per year), net cash on the balance sheet (~$2 billion) represents a third of its market cap and signifiant stock buybacks will add value when the business recovers BUT don't buy MRVL because it

Lacks Near-term Catalyst.

Those words are music to the ears of a value investor.

Some reports even had an angry tone - why didn't the Company pre-announce the miss? This typically happens when analysts are left a bit in the dark and feel embarrassed in front of their clients for not having given them proper warning to get out of the way before a miss.

Having been a former sell-side analyst myself, I chuckle at these because...well, I have been there. The question you have to ask yourself is this - What does that have anything to do with value?

Can this stock go lower? Of course it can. Most likely things will get worse before they get better but if you think like a business owner as opposed to a stock owner, Marvell's cash and free cash flow should provide you with some assurance that its business will remain intact through the downturn. It should not get distressed to the point where investors suffer a permanent loss of capital.

Whenever the cycle turns in Marvell's favor (and it likely will, that is why its called a Cycle) the appreciation in its enterprise value very likely will more than make up for the pain that investors are going through presently.

Disclosure: I am long MRVL.

We have been following closely this Chapter 11 case and it does have many points of interest.  See if you agree with us.

1. Southern District of Texas – Case 11-35926, 11-35927 and 11-35938. 

2. Financials are stale; the last earnings release goes back to Q2-10 according to which tangible book value at the time was $168 mm.  Equity market value currently is ~$4 mm.

3. Total pre-petition debt is $285 mm.  Total shares outstanding (per a 13G filed by AQR on 2/11/11) are $16 mm.  Assuming this data is still current, total EV is $289 mm.

4. Historical EBITDA data points are as follows:

2006:$17.7 mm; 2007:$50.4 mm; 2008: $57.1 mm; 2009: $39.1 mm; 1H10: $14.4 mm; Q210: $6.1 mm

5. Per a Form filed with the SEC on 6/30/11, here is some color on 2010 results:

“Due to the negative trend in general market conditions and in the tanker charter market during the year ended December 31, 2010, the registrant anticipates that there will be a decline in its results of operations for the year ended December 31, 2010, as compared to the same period ended December 31, 2009. The registrant’s revenue is expected to decline by approximately $0.6 million, or 0.8%, from $64.5 million for the 12 months ended December 31, 2009, to $63.9 million for the same period ended December 31, 2010, while voyage expenses increased to $13.0 million in the year ended December 31, 2010 from $1.5 million in the year ended December 31, 2009. These changes related to certain vessels’ above market time charters expiring and those vessels trading in the somewhat depressed spot market during 2010. The registrant’s net income/loss is expected to decline by approximately $9.4 million, or 165%, from income of $5.7 million for the 12 months ended December 31, 2009, to a loss of $3.7 million for the same period ended December 31, 2010.”

6. There is significant insider ownership of stock – the CEO owns 21%; MHR Capital owns 8.5% and has been in the stock going back mnay years; AQR Capital owns 5.7% – we have seen both of these funds involved in bankruptcies in the past – with participation on various committees.

7. MHR Capital is being represented by Akin Gump in the case - there is no shareholders committee yet.

8. We have not been able to ascertain yet where the bank debt is trading or its ownership.  This article attempts to shed some light on it: http://www.tradewinds.no/tankers/585374/omega-in-chapter-11.

9. The Debtor contends that Lenders have adequate protection because book value of assets exceeds debt by more than $100 mm. 

10.  This is a contentious bankruptcy so we guess that it will drag on – and equity is at $4 mm so we see option value here.  ONAVQ is as speculative as speculative gets but it has several aspects which can make a case for residual value for equity... and residual value worth fighting for..... 

I will warn you that reading this post will take a little patience and its about a micro cap stock, to boot.

Back in early 2009, when most of us were sweating over the security of our FDIC-insured checking accounts (remember those days?), dozens of small biotechs were trading for pennies on the Dollar. Dollar being hard cash minus all on- and off-balance sheet liabilities PLUS the next 12 month's cash burn.

Neurobiological Technologies was one such name. Here is a summary of an old write-up (dated 2/16/09) on it:

"Summary: After the failure of a key drug (Viprinex) in 2008, NTII is left with no significant operations. Its most recent balance sheet dated 12/31/2008 shows a cash & investments balance, net of liabilities, of $7.6 mm or $0.28 per share....

Read Full Post at http://oozingalpha.blogspot.com/2010/10/xerecept-revived.html



Disclosure: Long NTII