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  • Hidden Value: Universal Security Instruments - Part 2
    Continuing on from Part 1, I'm going to take a look at the intrinsic value of Universal and discuss any risk factors.

    I've used the adjusted earnings approach recommended in Greenwald's Value Investing to determine the intrinsic value.
























    I took the the average margin for 2007, 2006 and 2005 and applied it to the Earnings Before Income Tax to be able to adjust the earnings so that they are in line with normal market conditions, i.e. not depressed.

    From looking at the "Income as adjusted margin", we can see that Universal has not been able to maintain a reliable margin over the past 5 years and has often mismanaged their cash flow, resulting in either miniscule or negative margins.

    This will have a significant effect on the valuation. To determine Universal's intrinsic value, I have used the Earnings Power Value (EPV) formula suggested in Greenwald's book:

    EPV = Adjusted Earnings x 1/R

    R is the cost of capital. I chose 10% as the cost of capital because as a guesstimate, it seemed conservative, considering current low interest rates.

















    From taking a look at the "Total EPV", which is the value we estimate Universal to be worth, we can see that this stock is not likely to be a worthwhile long term investment as it struggles to maintain any reliable level of value, suggesting poor management and a poor outlook.

    However, from looking at the "Market to Book Ratio", it identifies that in the good economic times (2005-2007) the company was priced at least at 2x its book value and that it's a likelihood that if we invest today and hold until we return to more prosperous economic times, we could see a nice return but it would be purely speculation.

    For the above reasons, I would not invest in this stock.

    For the sake of following through, I'm going to highlight a particular risk factor which would also hold me back from investing.

    Risk Factor 

    Currently, over 40% of Universal's sales come from one large national retailer, the Home Depot. Any changes in this relationship would significantly affect the future of the company. This on its own would make me uncomfortable but there's also the matter that this retail relationship has in fact changed. The Home Depot will no longer be stocking Universal's products in their stores, apart from at the retailer's contractor desks. They will also be available online.

    Unfortunately, I do not have any figures to be able to guess how this might affect the future of Universal's sales but one can only imagine that their reliance and this change will not create a positive outcome.

    Again, for all of the reasons above, I will not even be considering Universal as a potential holding within my portfolio.

    NOTE: This is just my opinion. I'm not a professional in the financial world. Please conduct your own due diligence in any decisions to purchase, sell, or otherwise trade any stocks.


    Disclosure: No Positions
    Tags: UUU
    Feb 25 12:48 AM | Link | Comment!
  • Hidden Value: Universal Security Instruments - Part 1
    Universal Security Instruments, Inc. (UUU) designs and markets a variety of safety products consisting primarily of smoke alarms, carbon monoxide alarms and related products.

    It's an easy-to-understand company with great fundamentals. The current assets, which are made up primarily of cash and receivables (totaling approx. $9m), is sitting at around $14.98m (compare to Mkt Cap of $13.92m). There is almost no long term debt ($100k) and short term debt is minimal, sitting at $3.5m. 

    The Current Assets minus Total Liabilities is approximately 82.18% of the Market Cap. Without even considering any long term assets or the earnings power of the business, we've already accounted for over 80% of the current price of this stock. 

    Considering this and from looking at the value of the long term assets (see below), we can be assured that even if the company closes tomorrow, at the very least, our capital will be returned. This provides us with piece of mind and a level of safety in our investment.

    Before we continue the analysis, here's a quick table of the key numbers.


    Mkt Cap P/E P-to-B P-to-S Current Ratio ROIC (5 yr)
    UUU $13.92m 7.55 0.58 0.53 3.99 20.1%

    Book Value

    According to its most recent quarterly report, Universal's book value stands at around $10.76/share.

    After searching through the company's annual & quarterly reports, I believe that this understates its book value, when comparing it to the cost of reproducing its business.

    Take a second and look at the adjustments I've made. They are fairly self-explanatory but I do want to focus on one in particular.


    Universal owns 50% of a Hong Kong Joint Venture, Eyston Company Limited. It imports 97.3% of its product from Eyston and makes up 63.2% of Eyston's sales, as of March 31, 2009 (end of fiscal 2009).

    Eyston currently has an annual net income of $3.73m and net assets of $22.08m, of which $10.69m is cash and receivables.

    Supposing the stock market would be willing to pay 10 times for those earnings, Eyston would be worth $37.37m. This would make Universal's share worth $18.68m, meaning its stated value was understated by 54%!

    It is shown as "Investment in HK JV" on the balance sheet.

    By delving deeper into Universal's balance sheet, we can see that its book value per share was undervalued by approximately 25% ($10.76 vs. $13.51).

    In part 2, I will analyze the intrinsic value of Universal, compare it to competitors and discuss risk factors.

    Note: This is a new valuation approach I'm testing out so any thoughts or comments on it would be more than welcome.

    UPDATE: Thanks to great advice from Hester, I've re-evaluated my adjusted book value. With his help, I have realized that this 'sum of all parts' approach will not work in this scenario as the subsidiary is far too intertwined with Universal to be able to hold the value stated above without Universal existing. Thus, I shall revert to the original book value.

    Disclosure: No positions, UUU is currently on my watchlist
    Feb 20 6:40 PM | Link | Comment!
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