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TECUA: Soap Opera Over, Dirt Cheap!

|Includes:Tecumseh Products Company (TECU)

I have been building a position in the foundation I manage as well as in the Top 20 Model Portfolio in Tecumseh Products Class A shares.  I had only heard of this company and had always looked at it as a value trap without really knowing the story.  I have invested a lot of time in the past week reading SEC filings and talking to the I.R. contact at the company (who is very helpful - Theresa Hess at (734)-585-9507).

I will probably share more detail in the coming weeks - they won't be reporting until early March, so I have time I believe.  Still, I wanted to share a brief outline of my thought process.  Before I do that, just a little background.  You can learn more about the company by visiting their website, but they make compressors for refrigerators, freezers and other HVAC equipment.  Over 80% of their sales are overseas - they operate plants in Brazil, France, the U.S. and India.  The company has two classes of stock, the "A" shares (no voting rights) and the "B" shares (TECUB), which have all the voting rights.  The company has about 18mm shares total - 13mm A and 5mm B.  The Herrick Foundation owns about 1/3 of the B shares and 15% or so of the entire company.  There was an ugly proxy fight last year that resulted in the Herricks regaining control of the Board and two key employees (the former CEO and CFO) leaving.  Just recently, the senior management team has been announced, with the former COO becoming CEO and two key hires (a new CFO and a new COO essentially, though not with that title).  The guys that left were doing the right thing, and the new guys will too.  The stock trades at tangible book value DIVIDED BY 2, though it has net cash on the book.  They did burn cash in 2009, but they expect to generate operating cashflow in 2010. 

Here is my thought process:

  • No one knows or cares about this company - no analyst coverage
  • No one really cares about the industry from a macro sense - it's dull and mature
  • It is very cheap to tangible book value (PPE represents over 1/2)
  • The soap opera is over
  • New Management seems highly capable
  • The Herricks have expressed an interest in selling
  • The business is very depressed after collapsing end markets and inventory adjustments
  • If the company can breakeven on cash generation, it is a double to TBV
  • If the company can actually grow again, it is a triple to 1.5X BV
  • The company has earnings power of at least $1, but probably much higher
  • Most people I know are looking for industrials, especially with 80% OUS sales
  • No issues with inventory or receivables
  • The business seems to have bottomed
I probably could say more, but I think it frames the situation.  The stock would seemingly have little downside here given the valuation (assuming that cash burn stops, which makes sense) and the lack of significant debt.  The upside seems phenomenal - 2X to 3X depending upon how well management does and how stable or strong the end markets become. 

Disclosure: Long TECUA
Stocks: TECU