The purpose of this blog is to allow the cooperative community of SVNT board posters to identify new ideas and to discuss them. Hopefully, those discussion will allow those who are interested in a particular name discussed here to migrate to the Yahoo! board of that particular company, while still continuing to participate here. In that way, this sort of could become a "clearinghouse" for ideas.
I intended my post about SPA to be a "model" of the kind of writeup that I would encourage here.
I am open to giving those of you (and you know who you are!), the ability to make not just comments here, but to post your own ideas and opinions directly.
One other person already has the ability to do that, and I have invited a few others whose email address was provided by them, but they have not yet responded. As we used to say at the beach: Jump right in, the water's fine.
Jay (aka AA)
Friday, September 24, 2010
Wednesday, September 22, 2010
Link to Lawndale's Seeking Alpha Blog including Sparton
http://seekingalpha.com/author/andrew-shapiro
a
http://seekingalpha.com/instablog/36551-andrew-shapiro/91918-sparton-delphi-medical-acquisition-hits-the-sweet-spot-should-be-highly-accretive
This blog has a lot of material on Sparton as well as some of Lawndale's other investments.
a
http://seekingalpha.com/instablog/36551-andrew-shapiro/91918-sparton-delphi-medical-acquisition-hits-the-sweet-spot-should-be-highly-accretive
This blog has a lot of material on Sparton as well as some of Lawndale's other investments.
Corrections & Amplifications
The previous blog post has been re-posted with corrections and amplifications.
Regards
JH
Regards
JH
Tuesday, September 21, 2010
My First Idea AfterSVNT is SPA - Sparton Corp.
OK, I am going to kick us off with my first proposal for the AfterSVNT blog. Justaguy and I have discussed it a little bit in the comments to a prior post.
My pick is Sparton Corp., a more than 100-year old manufacturing company trading at about the $5.75 level with 10 million shares outstanding and about a $58 million market cap.
This company currently is virtually debt free and had about $30 million of cash on its balance sheet at June 30th. In addition, the company has a piece of unused real estate in New Mexico for sale, with an original asking price about $6.5 million. In 10FQ4 (June 30th) the company took a charge to write down the property to its net realizable value. There are four manufacturing facilities: one in OH, two in FL, and one in Vietnam. In addition, there are tax loss carryforwards that can shelter about $15 million of future pretax income from taxes. This loss carryforward is not yet assigned any balance sheet value because the company has not yet experienced a long enough period of consistent profitability. However, the company's restricted cash is likely to become available to it as its profitability will qualify those funds (earmarked for future environmental remediation spending)
There are three divisions, with by far the most important (on an operating profit basis) being the Defense & Security Segment (DSS). This division makes "sonobuoys," disposable electronic devices used to track the comings and goings of submarines. These devices are deployed from anti-submarine warfare aircraft and helicopters, used once, and never recovered. There are two manufacturers, but they operate as a joint venture and split annual two-year orders from the US Navy. Typically, there also are orders from friendly foreign navies. It is supposed that China's ongoing construction of a modern submarine fleet is likely to result in an increase in orders over the next 5 to 10 years at least from foreign navies. This timeframe is a bit far out for me, investment-wise, but comforting nonetheless.
A second segment produces medical devices, primarily on a contract design/manufacturing basis, while the third is a contract electronics manufacturing operation (think Flextronics or Sanmina but much, much smaller).
The company suffered a lengthy period of mismanagement beginning in the late 1990s, after the departure of the management team that had taken control of the company shortly after the end of World War 2. In 2008, agitation by investors that included hedge fund Lawndale Capital Management (current owner of 9.5% of the stock, 968,616 share according to Bloomberg) resulted in the appointment of a new, outside CEO practically at the height of the post-Lehman financial crisis. A new management team began to take action in early 2009, effectively saving the company from a bankruptcy filing that many believe was only weeks, if not months away. Only successful negotiation with a large number of third parties including bankers, customers, and the Defense Department provided Sparton with the cash needed to regain a semblance of financial health. Since that time, a classic financial and operational turnaround has increasingly become evident.
The turnaround included major cost cutting, the liquidation of excess inventory, collection of excessive levels of Accounts Receivable, and the "firing" of unprofitable customers. Basically, the new management team did everything they could to stem the bleeding and right the ship. That included shutting down multiple underutilized manufacturing facilities including the former Headquarters facility in the company's home town of Jackson, MI and one in Canada. Employees also were let go and the company's cost structure was rationalized. Cash raised was used to eliminate debt and to raise the company's cash position.
More recently, improved profitability has been at least in part a result of significantly improved rejection rates at the sonobuoy operation, as scrap and rework costs were cut sharply.
As of now, the company has posted 4 consecutive profitable quarters despite the lower sales base that resulted from letting customers go. Offsetting the lower sales is the cost cutting as well as the elimination of unprofitable revenue. In the current quarter (11FQ1) SPA completed the acquisition of Delphi Medical Systems for approximately $8 million. In addition to $10 million of inventories, SPA acquired 2 facilities. The deal includes a potentially favorable inventory valuation adjustment, and should quickly (though not immediately) be additive to earnings and cash flow. The operations acquired add to the company's customer base and should result in about $32 million in sales that go into the Medical division (not the EMS division as stated in an earlier version of this article.)
With $2.25 a share in cash (after subtracting out the $8 million acquisition, but not including the restricted cash balance), and a solid core defense segment, I believe SPA is in a position to generate nearly $1 a share in cash flow (about $10 million) in its FY2011 (ends June 30th).
Management indicated on the most recent conference call that the company would increase its spending on R&D and would pursue acquisitions that promise rapid incremental profitability using a combination of existing cash and ongoing free cash flow. In a recent conference presentation, management announced a target of $500 million of revenue for its FY 2015. This is an ambitious growth rate of better than 20% CAGR for revenues over 5 years.
If Sparton were to be successful in achieving its objective of $500 million in annual revenue and could earn a relatively modest 5% net income margin after taxes without increasing the share base appreciably, earnings could approach $2.50/share. There is quite a bit of blue sky between that objective and the company's present condition, but a stretch goal such as that surely is designed at least in part to be inspirational.
Trading in the stock is thin, about 22,500 shares per day on average over the past three months, and this is not a day trading opportunity. Care needs to be taken in accumulating a position, and I recommend that investors build their position over time as they learn more and grow more comfortable with the company and its prospects.
In sum, I think SPA is now a solid, profitable company with a large cash cushion and a new management team that has made near miraculous progress in getting the company back on track after a long period of decline. if SPA can achieve $1 a share in cash flow, I can easily see this as an $8 stock. That makes it more and more attractive as it drops below the $5.50 level (which would equate to 50% upside). This $1 per share in cash flow is essentially the same level of profitability that I figured about a year ago when I first began looking at Sparton after having had it "on the back burner" for more than 10 years.
I know more, but this is certainly sufficient for now.
Jay (aka AA)
My pick is Sparton Corp., a more than 100-year old manufacturing company trading at about the $5.75 level with 10 million shares outstanding and about a $58 million market cap.
This company currently is virtually debt free and had about $30 million of cash on its balance sheet at June 30th. In addition, the company has a piece of unused real estate in New Mexico for sale, with an original asking price about $6.5 million. In 10FQ4 (June 30th) the company took a charge to write down the property to its net realizable value. There are four manufacturing facilities: one in OH, two in FL, and one in Vietnam. In addition, there are tax loss carryforwards that can shelter about $15 million of future pretax income from taxes. This loss carryforward is not yet assigned any balance sheet value because the company has not yet experienced a long enough period of consistent profitability. However, the company's restricted cash is likely to become available to it as its profitability will qualify those funds (earmarked for future environmental remediation spending)
There are three divisions, with by far the most important (on an operating profit basis) being the Defense & Security Segment (DSS). This division makes "sonobuoys," disposable electronic devices used to track the comings and goings of submarines. These devices are deployed from anti-submarine warfare aircraft and helicopters, used once, and never recovered. There are two manufacturers, but they operate as a joint venture and split annual two-year orders from the US Navy. Typically, there also are orders from friendly foreign navies. It is supposed that China's ongoing construction of a modern submarine fleet is likely to result in an increase in orders over the next 5 to 10 years at least from foreign navies. This timeframe is a bit far out for me, investment-wise, but comforting nonetheless.
A second segment produces medical devices, primarily on a contract design/manufacturing basis, while the third is a contract electronics manufacturing operation (think Flextronics or Sanmina but much, much smaller).
The company suffered a lengthy period of mismanagement beginning in the late 1990s, after the departure of the management team that had taken control of the company shortly after the end of World War 2. In 2008, agitation by investors that included hedge fund Lawndale Capital Management (current owner of 9.5% of the stock, 968,616 share according to Bloomberg) resulted in the appointment of a new, outside CEO practically at the height of the post-Lehman financial crisis. A new management team began to take action in early 2009, effectively saving the company from a bankruptcy filing that many believe was only weeks, if not months away. Only successful negotiation with a large number of third parties including bankers, customers, and the Defense Department provided Sparton with the cash needed to regain a semblance of financial health. Since that time, a classic financial and operational turnaround has increasingly become evident.
The turnaround included major cost cutting, the liquidation of excess inventory, collection of excessive levels of Accounts Receivable, and the "firing" of unprofitable customers. Basically, the new management team did everything they could to stem the bleeding and right the ship. That included shutting down multiple underutilized manufacturing facilities including the former Headquarters facility in the company's home town of Jackson, MI and one in Canada. Employees also were let go and the company's cost structure was rationalized. Cash raised was used to eliminate debt and to raise the company's cash position.
More recently, improved profitability has been at least in part a result of significantly improved rejection rates at the sonobuoy operation, as scrap and rework costs were cut sharply.
As of now, the company has posted 4 consecutive profitable quarters despite the lower sales base that resulted from letting customers go. Offsetting the lower sales is the cost cutting as well as the elimination of unprofitable revenue. In the current quarter (11FQ1) SPA completed the acquisition of Delphi Medical Systems for approximately $8 million. In addition to $10 million of inventories, SPA acquired 2 facilities. The deal includes a potentially favorable inventory valuation adjustment, and should quickly (though not immediately) be additive to earnings and cash flow. The operations acquired add to the company's customer base and should result in about $32 million in sales that go into the Medical division (not the EMS division as stated in an earlier version of this article.)
With $2.25 a share in cash (after subtracting out the $8 million acquisition, but not including the restricted cash balance), and a solid core defense segment, I believe SPA is in a position to generate nearly $1 a share in cash flow (about $10 million) in its FY2011 (ends June 30th).
Management indicated on the most recent conference call that the company would increase its spending on R&D and would pursue acquisitions that promise rapid incremental profitability using a combination of existing cash and ongoing free cash flow. In a recent conference presentation, management announced a target of $500 million of revenue for its FY 2015. This is an ambitious growth rate of better than 20% CAGR for revenues over 5 years.
If Sparton were to be successful in achieving its objective of $500 million in annual revenue and could earn a relatively modest 5% net income margin after taxes without increasing the share base appreciably, earnings could approach $2.50/share. There is quite a bit of blue sky between that objective and the company's present condition, but a stretch goal such as that surely is designed at least in part to be inspirational.
Trading in the stock is thin, about 22,500 shares per day on average over the past three months, and this is not a day trading opportunity. Care needs to be taken in accumulating a position, and I recommend that investors build their position over time as they learn more and grow more comfortable with the company and its prospects.
In sum, I think SPA is now a solid, profitable company with a large cash cushion and a new management team that has made near miraculous progress in getting the company back on track after a long period of decline. if SPA can achieve $1 a share in cash flow, I can easily see this as an $8 stock. That makes it more and more attractive as it drops below the $5.50 level (which would equate to 50% upside). This $1 per share in cash flow is essentially the same level of profitability that I figured about a year ago when I first began looking at Sparton after having had it "on the back burner" for more than 10 years.
I know more, but this is certainly sufficient for now.
Jay (aka AA)
Monday, September 20, 2010
Welcome Husky, Justa!:
It has certainly been a "long, strange trip" with SVNT as Jerry G would say.
I have a number of what I consider "value" plays that I have followed for quite a while, but all of them are up quite a bit right now.
Probably the most interesting name on a pullback is SPA, which is just emerging from a turnaround after a near-bankruptcy and a management change. They are now debt free with $3 a share in cash and selling for under $6. There is a Yahoo! board that is reasonably informative, though there are a bunch of somewhat sour former employees.......
I think it can be $10 in 12-18 months. Not a SVNT, but neither is it a SVNT timeline or risk profile.
Any ideas?
AA, TraderJay
PS -- I think I have to "enable" you individually to let you start your own posts. Give me a couple of days to get it set up, otherwise use the comment section for now. I'm not a master at this stuff and pretty busy.
I have a number of what I consider "value" plays that I have followed for quite a while, but all of them are up quite a bit right now.
Probably the most interesting name on a pullback is SPA, which is just emerging from a turnaround after a near-bankruptcy and a management change. They are now debt free with $3 a share in cash and selling for under $6. There is a Yahoo! board that is reasonably informative, though there are a bunch of somewhat sour former employees.......
I think it can be $10 in 12-18 months. Not a SVNT, but neither is it a SVNT timeline or risk profile.
Any ideas?
AA, TraderJay
PS -- I think I have to "enable" you individually to let you start your own posts. Give me a couple of days to get it set up, otherwise use the comment section for now. I'm not a master at this stuff and pretty busy.
Friday, September 17, 2010
This is the AfterSVNT Blog
This Blog is open to "approved" posters from the SVNT Yahoo! message board who have shared a lengthy and (hopefully for all) rewarding experience investing in and trading shares of SVNT over the past many years.
On that message board, I believe we became a community, and have, despite our anonymity, developed strong relationships. We have the ability to criticize each other with rancor that is within acceptable limits, developing and improving information that has led to our mutual success.
The purpose of this blog is to provide those users with an easy to use forum that allows us to discuss our investment ideas, get criticism of them from our peers, and share information and opinion about a wider group of opportunities.
I am your moderator, Jay, and I Yahoo with the handle AlexAlekhine
On that message board, I believe we became a community, and have, despite our anonymity, developed strong relationships. We have the ability to criticize each other with rancor that is within acceptable limits, developing and improving information that has led to our mutual success.
The purpose of this blog is to provide those users with an easy to use forum that allows us to discuss our investment ideas, get criticism of them from our peers, and share information and opinion about a wider group of opportunities.
I am your moderator, Jay, and I Yahoo with the handle AlexAlekhine
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