The first new idea I presented AfterSVNT was Sparton Corp., a diversified electronics manufacturer engaged in defense, medical, and electronics manufacturing services operations.
I am happy to report that this pick has been a smashing success...so far. (There is ALWAYS a "so-far" when it comes to investing, as long-time "Savienters" must by now realize).
I first posted about SPA on September 21 and the stock closed that day at $5.50. I will use the following days close to measure "performance" for this pick, and SPA rose $0.25 a share the next day, closing on 9/22 at $5.75 per share. As this is written, SPA is trading at $7.75 per share, up almost 35% in about 6 weeks or so. A nice pick, but probably not representative of my long-term ability, otherwise I would have (almost) as much cash as Warren Buffet rather than writing this blog!
Yesterday, SPA reported 11FQ1 earnings for the quarter ended September 30, 2010. The company reported an "adjusted" operating earnings figure of $0.16 a share for the quarter. GAAP e.p.s. was $0.40 per share and included a $0.24/share "gain on acquisition." Revenues would have been down considerably were it not for the revenues acquired via the acquisition of Delphi Medical.
On August 6, SPA closed on the acquisition of the assets of Delphi Medical for a price that the company's management states was less than the fair value of the assets acquired. As a result, their accountants decided that the difference between those figures represents a gain that should go through the income statement. Now, I don't have a CPA, but I do have an MBA, and I dissect financial statements for a living (my day job). I must say that I cannot recall having seen something exactly like this, and frankly, it does not smell 100% kosher to me, accounting-wise. Maybe one of you guys out there with a CPA can set me straight on this issue!
All of which brings me back to SVNT. Justaguy will remember this event, as he was around, and SVNT was still named Bio-Technology General. For several years, BTGC carried an item on its balance sheet listed as "Negative Goodwill." Eventually, they were forced to restate their results to eliminate the "Negative Goodwill" since such an accounting entity does not meet GAAP requirements. I suppose this is a reason why SPA decided to put it through the income statement instead of putting it on the balance sheet where it does not belong.
In any case, SPA remains virtually debt free, with about $2.75 a share in cash on its books, and earnings somewhere in the neighborhood of $0.75 a share as a representative run rate over the past year.
Management has turned its sights from restructuring both operations and finances to restoring growth and searching for acquisitions that can add to profits and cash flow.
I still think the stock is cheap here, but it has had a substantial move over a relatively short period of time and is entitled to a pullback of some sort.
Jay Hains/aa
Good pick.
ReplyDeleteI think I first started watching it at $5.60 in late Sept. I see it was up again today closing at $7.88. With the low volume and big spread in retrospect I should have just tried to build a small position back then. Used to very liquid stocks.
The gain on acquisition should be asked about on the conf call but I think it is the result of the need to book the assets acquired less the cost paid. I don't know about the throughput on the income statement but you have to book it into shareholder's equity and do you do it in the same manner of a direct to balance sheet currency adjustment. I don't think so . Thus I guess that is why it has to flow through income statement.
ReplyDeleteI feel this stock has gained and will gain more liquidity as its stock price rises. It still is not part of RU 2000 index and has no analyst coverage. All liquidity enhancing milestones. This blog and Seeking Alpha articles are bringing SPA to the attention of the greater investment community and also enhancing liquidity.
Thanks, Lawndale, for you comments and for stopping by!
ReplyDeleteRelative to the "gain on acquisition" I actually had a second company this quarter report such a transaction last week, Southwall Corp (SWTX).
I'm not going to second guess the procedure at this point. It certainly is fodder for a conference call question. Back in the day I thought I was taught that you can't write up the value of an asset and that it should be booked at the lower of cost or market. I suppose what was GAAP when I was a kid (relatively speaking) might not be GAAP now.
I also think one of the things that is driving the stock is the fact that it is not that far-fetched to think that the company could get to $500 million in revenue in 4+ years. As I have written, if they can earn a modest 5% margin on revenue on that, its $2.50 a share in earnings. In any case, a 5% margin on the current revenue run rate of ~$175 million gets the company close to $0.90 per share.
I think they answered the gain issue on the call. You have to put the assets originally purchased on the books at market (less reserves- which I think SPA mgmt probably put on as much as they could). RDI was required to do this when its three predecessors companies were merged to become Reading Int'l at the end of 2001.
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