Tim Eriksen

Peerless Systems Gets Ready to Rumble with Highbury Financial

This should be an interesting story to watch unfold. IMO, both stocks are attractively priced. Peerless has no debt, and ended the April quarter with $2.57 per share in cash/investments. They received additional funds that were held in escrow this quarter. So cash/investments should be around $2.90 per share, yet the stock trades at $2.22. They have been buying back their own shares.

Highbury, an asset manger with around $5 billion of AUM, is also debt free. Has cash of around $1.55 per share, book value is $4.50, and has current annualized cash earnings of 40 to 45 cents per share. At $4.22, it trades at 10 times cash earnings, and just 6 times cash earnings if you adjust for the cash on the books.

Highbury Financial: A Forgotten Money Manager

Excellent overview of a definitely under-followed company. I own it in both client accounts and the private fund I manage. While I wish there was currently a stronger growth aspect, the ridicously cheap valuation makes the stock very attractive.

The stock is at $2.75 per share, with no debt, and nearly $1 per share in cash, which is growing 10 cents per quarter. So net of cash, it trades at 4 times free cash flow. That is an excellent investment in my opinion.

I don't agree with the author's argument to repurchase the warrants. They are too far out of the money to worry about at this time. I'd rather see them buy back all the stock they can at these levels. It is incredibly accretive. Their business model is so solid (as you noted AUM would have to fall 70% for Highbury to actually lose money) I would be comfortable with using debt to repurchase shares.

Another aspect that I rarely see mentioned is the Contingent Adjustment Payment. See Item 3 in their 10-Q. Basically when they bought Aston their was a price adjustment feature based on annualized revenue for the six months ending November 30, 2008. If annualized revenues were higher than a specific target Highbury would have to make an additional payment. If annualized revenues were below, they would receive a payment (max. $3.8 million).

As of March 31, 2008, Highbury would receive a payment of $1.5 million. My estimation is that as of June 30, it would now be closer to $2 to $2.5 million (20 to 25 cents per share) due to the market falling in Q2. According to the CEO all of this money would be untaxed, and go to Highbury. That essentially gives the owner a short term hedge if the market stays down or falls further.