Emerson Radio Corp.: A Net-Net Refusing To Liquidate, For Now

Aug. 13, 2019 10:50 AM ETEmerson Radio Corp. (MSN)5 Comments3 Likes
Ruerd Heeg profile picture
Ruerd Heeg
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Summary

  • Since 2016, control of Emerson Radio Corp. changed twice. In the mean time, business deteriorated.
  • Despite pretty large buybacks, the stock remains undervalued. Therefore, I recommend a small position in this stock.
  • In my opinion, the easiest way for management to fix this stock is liquidating the company. I discuss several scenarios below.
  • This idea was discussed in more depth with members of my private investing community, Global Deep Value Stocks. Get started today »

Emerson Radio Corp. (NYSE:MSN) designs electronics and household appliances to sell under its own brand and licenses its brand to others. It used to have a licensee for its trademark, and get most of its revenue from it, but that contract ended on December 31, 2016. There is still some license revenue but this is very small compared to revenue from product sales.

The reason I find this stock interesting is that it trades for less than its liquidation value. Such stocks have great returns on a statistical basis. At last Friday's share price of $1.07, the market cap is $26.5 million including the fair value of the preferred shares. My estimate of the liquidation value is the inventory discounted with 50% plus cash, receivables and short-term investments minus all liabilities. This is $36.7 million. Therefore, Liquidation Value/Market cap = 1.385. This is not as cheap as Benjamin Graham liked his net-nets but Emerson Radio Corp. is still very cheap in today's market.

In addition this might be a better net-net since most assets are cash and short-term investments and there are few liabilities. Such a balance sheet resembling a cash shell makes a liquidation of the company easier. Moreover, there is negligible bankruptcy risk with this stock. Another positive for the stock are shareholder-friendly buybacks.

Corporate governance and controlling shareholders

With net-nets, much depends on corporate governance and on what the controlling shareholders do with the company, so let's have a look.

The company was part of Hong Kong company Grande Holdings. That company was for several years in receivership. Therefore, the main shareholder of Grande did not have control of Grande Holdings and partially owned subsidiary Emerson Radio Corp. Because of this, investors speculated Emerson Radio Corp. would be liquidated. But Grande Holdings emerged from bankruptcy and its main shareholder, Christopher Ho, got back control over Emerson Radio Corp. That was at the all-time lows for the stock. The news Ho would get back control may have caused panic sales among investors. See for example here.

However with Ho at the helm, fears for the worst did not come true. He did not liquidate the company but instead, the company spent $8.88 million on buybacks between July 1, 1 2017 and December 31, 2018. During most of this time, the share price was around $1.45. So Emerson Radio Corp. bought back many shares below liquidation value but the discount to liquidation value was only small.

This filing from August 25, 2017 mentions a change in control of Grande Holdings. Subsequent filings show this transaction was completed. As a result, the recent annual report mentions Christopher Ho does not have voting control on any shares of Emerson Radio Corp. but he is still the chairman. Now Mr. Bingzhao Tan and Ms. Guichai He together control 72.4% of the shares.

The change in control did not trigger a change in strategy. The company continues to design products, have them manufactured in China and sell these products in the US. For about half of the revenue, the company depends on Walmart (WMT) and the rest mainly comes from Amazon (AMZN) and Fred Meyer. Gross margins and revenues have been terrible and worsening. The company tries to mitigate it by looking for new distributors. The company could also delist its stock to save costs but I do not think such costs savings will be enough to stop losses. So to me it is surprising the company does not liquidate itself.

Scenarios

With Emerson Radio Corp. there are 3 main scenarios. First, the company continues selling products at low gross margins and therefore continues to make losses. In that case, the shares will gradually go to zero. Second, management and the controlling shareholder wake up and liquidate the company. The sooner this happens, the more shareholders will get. If it happens soon, shareholders will see a nice return. Third, but the least likely, the company turns around: revenue and/or margins will increase making the company profitable. That could include a new license contract with a large electronics manufacturer. In addition, the company hopes to increase revenue by increasing sales via other distributors. In that case, the future share price will depend on how profitable the company becomes and what the company will do with the profits.

There are other scenarios of course. For example, someone could buy the company for its brand assets or the company could use its cash to buy a profitable company. The mechanism behind the extraordinary returns of net-nets is a higher probability of actions from management to get the share price up. What those will be for Emerson Radio Corp. we do not know yet. We do not know either whether management will succeed. But again, statistical returns of net-nets are high for a reason.

Bottom line

Finally, my impression is that net-nets combining a balance sheet similar to a cash shell with buybacks have lower downside risk than other net-nets. So most likely, shareholders of Emerson Radio Corp. will see good returns going forward. Therefore, I recommend a small position in this stock.

What keeps myself from investing in the stock is the following question: is the situation right now worse enough? I remember holding the stock at all-time lows in 2016. At that time uncertainty and fear peaked. I sold less than a year later for 50% profit. Right now, I pass because I have much more choice as a global investor. Because I am not limited to investing in US-listed stocks, I can buy better stocks at comparable prices as Emerson Radio or more feared stocks with comparable quality as Emerson Radio.

Become a statistical investor. Investing is mostly a game of luck. Therefore it is dangerous to invest based on conviction with large positions. But investing with many small positions in undervalued stocks with statistically great returns works just as well. So that is what I do, with 7 proven global stock strategies.

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This article was written by

Ruerd Heeg profile picture
3.36K Followers
As a mathematician (Ph.D.) I use 7 quantitative strategies with statistically extremely high returns. I select these cheap companies with software comparing thousands of global stocks on value metrics, liquidity, quality metrics, and momentum. I focus on global nanocaps and net-nets. Check Turning Rough Stones: turningroughstones.substack.com
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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