Recently, Planar (PLNR) reported a profit for the quarter ended September 30th, its fourth fiscal quarter. Click on the title of this post to visit the company's home page.....
With about 20 million shares outstanding (I am rounding up for simplicity, the earnings report gave 19.4 million as the FD figure) and a share price of $2.10, PLNR has an equity market capitalization of about $42 million. This debt-free company has almost $32 million of cash on its balance sheet, about $1 million more than a year earlier. The company's cash position means that a buyer of the company at its current price would recoup all but $10 million of its investment just from the company's current cash position. Of course, the company needs some cash to operate.
The company reported Total Current Assets of $96 million compared to Total Current Liabilities of $39 million. The differential of $57 million is just shy of $3 per share, and was approximately unchanged compared to a year earlier. The company indicated that its tangible book value was $3.20 per share.
PLNR generated revenue of about $175.7 million in the fiscal year ended September 30, 2010, compared to $174.9 million in the prior fiscal year. For the recently-completed year, PLNR posted pretax operating income excluding amortization of intangibles of about $1 million, compared to approximately a break-even performance in the prior fiscal year.
So what does PLNR do?
PLNR manufactures specialty displays for multiple markets including military and space, utility and transportation hubs, shopping centers, banks, government agencies, and home theater applications. When you watch CNBC on TV, you probably are looking at some displays made by PLNR. When you see footage from the TV commercial for the Air Force that shows their cyberwarfare exercises on large displays, you probably are looking at PLNR products. A recent contract has PLNR supplying screens that will be used for railroad track inspection on specialty rail cars in China.
Try the web site: www.planar.com
The company has been a poor performer for many years and I am involved in trading/owning the shares in a significant way for the first time this year, despite having "monitored" the company for more than a decade. Why? Management has exited some businesses where they could not compete. The company's shares seem overly punished compared to its robust cash and working capital position. In addition, management appears recently to have been successful in reducing expenses. The growth business opportunity appears to be the in-store retail display business.
Recently, the stock has pulled back modestly after the 10FQ4 earnings report, as management indicated the company would post a loss of a single-digit cents per share in the December quarter, and refused, blaming a lack of visibility, to make a projection for the new full fiscal year ending September 2011. With the stock at $2.10, the company not shedding cash on an operating basis, and tangible book value of $3.20 per share, I think PLNR could well have upside of 30-40% from here to a range that approaches $3.00.
Jay Hains/aa
Do you see any specific catalysts here or are you looking at it as just an asset play? Does the company have any competitive edge in their growth markets- the customized screens? Do you think management will allocate the cash wisely? Looks interesting.
ReplyDeleteGood questions, Iceking.
ReplyDeleteAs for specific catalysts, I think the answer is "no." One of the reasons that the stock is not doing well at the present time, I think, is that there is no specific catalyst out there waiting to happen. Thus, it is a typical "deep value" play where the company's cash position represents a strong "margin of safety" in the terminology of Ben Graham. The company's debt-free position makes the cash position even more valuable, as does the fact that it has generated two consecutive years of positive Cash From Operations and positive FCF (FY09 & FY10), after posting negative CFO figures for the two years before that (FY07 & FY08).
Your second question is equally good. They serve specialty markets, for the most part, it appears. Custom and embedded screens, very high end home theater systems, utility control rooms, etc. The press release does indicate that they achieved 18% YoY growth in their sales of in-store displays for retailers. It seems to me that could become a significantly bigger market over time, but your question is right on point: if they had a strong competitive advantage, they wouldn't have been going through such difficult times over the past few years (and longer, even).
As to allocation of capital, management has said that they want to hold a large cash balance in order, and I am paraphrasing loosely here, to "play it safe."
The low on the stock was 36 cents on February 6, 2009, about a month before the equity market bottomed. It hit $3.75 in April 2010, a ten bagger. I think it is not unreasonable for the stock to recover to $3 or more (more than 40% above today's price) over the next few months, if the company continues to perform i na steady fashion, generating FCF.
At the end of the day, probably half of the cash position can be considered "in excess of the company's needs." So if you back out half of the cash from the market cap, it goes from $42 million to $25 million. If the company is capable of generating $5-$8 million per year of FCF, then a $25 million market cap is very cheap.
If management can identify a growth opportunity, begin to capitalize on it, and communicate that opportunity to investors, then I think the stock has even greater potential.
In sum, I think the stock is considerably undervalued, has potential, but still needs to "prove it" in order to get a more normal valuation. As a micro-cap, it deserves some discount, but not this big a discount.
Thanks for the feedback.
ReplyDeleteIt doesn't seem like there is any reason for them to be in the desktop monitor and projector markets. Do you think there is any chance they will get out of that business? I guess it is hard to do when it is still about 30% of revenues. The home theater business also seems very tough. If they were really serious about shareholder value they would sell off the assets in those markets as well, return some of the capital to shareholders, and reinvest the rest in becoming dominant in these custom and embedded screens. But of course that would leave management with a much smaller company to run in the meantime so it won't happen barring an activist getting involved. It is very hard for public companies to evolve.
That said, if they can just tread water in the other markets and keep growing the specialty side then this could be a big winner.
I don't know for sure, but I am guessing that the technology and IP are too closely integrated to either enable or warrant the sale of any of the remaining business segments.
ReplyDeleteAlso, who would want to buy such tiny, niche players in such big, tough markets? It is difficult to determine which businesses have which kinds of margins relative to the others, as they seem to give only passing, unquantified reference to that factor. I would guess that displays have pretty low margins, but again, the company is, I think, focusing on niche applications.
I have not spoken to management here.
As far as I can tell the only analyst coverage is from Needham & Co.
Also, I think the conference call is available on Seeking Alpha.
Agree an asset sale could not really be feasible, but I just wonder how they will be able to improve the ROIC in these segments given that they are such a small player with what seems like no competitive advantage (more worried about this with the desktop monitors and projectors than in high end home theater- although seems like they have really struggled there as well).
ReplyDeleteIt is a bit hard to analyze as on the 10-K they only break down revenue and operating income by segment and only discuss gross margin by segment qualitatively in the MDA. But clearly the industrial segment is their best business (20% op. margin), control room next (16%), commercial (12%), and home theater (hasn't made any money yet). This is all before corporate OH so not sure how clean the break out is, but I think you can get an idea.
Reading the transcript it sounds like management thinks they will have to spend a bunch of the cash to grow the top line. I thought maybe we could just anticipate continued growth in the industrial and control segments to get to significant cash flow, but seems it is not as simple as that, at least not without further reinvestment. On the other hand, at least they say they will be prudent with how they spend the cash.