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Alan Brochstein, CFA
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Alan Brochstein, CFA has worked in the securities industry since 1986, primarily with the responsibility for managing investments in institutional environments until he founded AB Analytical Services in 2007 in order to provide independent research and consulting to registered investment... More
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  • TECUA: Soap Opera Over, Dirt Cheap! 5 comments
    Jan 13, 2010 12:57 PM | about stocks: 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
    Themes: tecumseh Stocks: TECU
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Comments (5)
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  • Ricard
    , contributor
    Comments (3829) | Send Message
     
    Fascinating...

     

    Even after your article, I'd have to conclude it looks like a value trap. I haven't looked at a 10k or anything else as of yet, but its earnings over the last *5 years* have been horrendous. If your scenario about a bottom is correct, I'd still want to know what happened over that period of time, and whether or not it has a chance of recurrence.

     

    Is this really a case of Buffett's quote about owning businesses that even an idiot could run, because eventually they will be run by one?

     

    Anyway, thanks for the read.
    4 Mar 2010, 09:10 PM Reply Like
  • Alan Brochstein, CFA
    , contributor
    Comments (7602) | Send Message
     
    Author’s reply » Ricard, ask yourself why the individual who owns a global distributor and is one of their Top 2 customers has put so much of his personal money into the stock over the past year and continues to do so. I spoke with his associate to get a better understanding. It's not a great business (15-20 GM), but this is a company that HAS been run by idiots but no longer. When you do your analysis, you need to understand that the company has divested 2 of its 3 businesses in what proved to be exceptional timing (even a blind squirrel!).
    5 Mar 2010, 07:15 AM Reply Like
  • Ricard
    , contributor
    Comments (3829) | Send Message
     
    Thanks for the info.

     

    I must admit, I am still skeptical...I've seen some higher-ups do some astoundingly stupid things. My first stock investment was in 'Value America' run by Craig Winn - he was probably the only winner in that dot-com poster child - he sold enough stock to be a millionaire 50 times over. Who were his investors? Paul Allen, Fredrick Smith come to mind (one of the founding fathers of the modern computer infrastructure, and the founding father of the world's most prolific logistics firm...perfect for a dot-com). Who were his brand partners? P&G, J&J, HP...thousands of America's most recognizable brands.

     

    It took less than one year from going public before that company was run to the ground.

     

    Anyway, I guess I have some soul-searching to do before going into this one. Good luck.
    5 Mar 2010, 07:54 AM Reply Like
  • Alan Brochstein, CFA
    , contributor
    Comments (7602) | Send Message
     
    Author’s reply » Ricard, let me make it easy. This is a commodity. They compete in the independent space with Coleman (owned by EMR). Their customer, WHR, competes with them too but continues to use their products. The company got hit with a double-whammy - end markets collapsed and the supply chain destocked. The new guy from Sporlan (part of Parker Hannifin) is an amazing hire. According to their distributor, they are already seeing vast improvements. Note also that this is a huge play on growth in Brazil and India. It's cheap because the numbers have been horrible and no one follows the stock. I will be shocked it this thing doesn't get to 25 by the end of the year.
    5 Mar 2010, 12:12 PM Reply Like
  • Ricard
    , contributor
    Comments (3829) | Send Message
     
    Thanks again. Your 'scuttlebutting' here is quite invaluable...not sure I would have picked up any of this with my normal DD. Of course, I would have skipped it altogether had I not noticed your interest in it.
    5 Mar 2010, 12:37 PM Reply Like
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