BSHI 11.6.10 (JT Davis Example)

BSHI 11.6.10 (JT Davis Example) - SUMMARY Positives 1)...

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SUMMARY Positives 1) Cheap to Assets -- Currently trading at 81% of my estimated liquidation value -- The majority of the liquidation value is cash and receivables (and we take a large haircut on inventory) 2) Cheap to Cash Flow -- LTM Multiples of 2.7x FCF and 2.3x EBITDA based on TEV -- LTM Multiples of 5.0x FCF and 4.4x EBITDA based on Market Cap -- Cash flow should increase as a result of the "go dark" transaction 1) The company has incurred total expenses of $251k over the last 12 months in reference to the transaction (excluding cash-out of shareholders) 2) The company estimates that they will save $225k in public company expenses as a result of the "go-dark" transaction (we assumed 80% is cash savings) -- Pro forma for these expenses, the multiples become the following: -- LTM Multiples of 2.4x FCF and 2.1x EBITDA based on TEV -- LTM Multiples of 4.4x FCF and 3.9x EBITDA based on Market Cap 3) NOL -- Although the NOL is huge ($22.5mm), the vast majority of it expires in 2011 and 2012 -- I would estimate that the company likely does not pay any federal income tax until 2014 4) Strong liquidity -- The company has a large cash balance ($8mm), a completely undrawn revolver ($7mm), and stable operations with low operating leverage (low likelihood of cash burn) -- The revolver (L+250) unfortunately comes due Jan 4, 2011 (gets rolled every few years) Negatives 1) Potential to get disintermediated if clients start going straight to Asia to get their supplies -- The company has shown strenght in being able to maintain a 25% gross margin -- Any transition to disintermediation could take a while given that they have thousands of clients -- Clients are every fragmented and it seems they do not have the means to arrange their own Asian manufacturing 2) CEO and family own 54%, Total insiders (officers, directors, etc) own 63% -- One incident to worry about is the company's donation of their old corporate headquarters to a local charity -- This was carried at $174k, but likely had a higher market value than that (given that the asset was depreciated) -- There was no tax advantage to this transaction given that the company has a large unused NOL -- Compensation, fees, and expense reimbursements paid to directors or their affiliates totaled $435, $392, and $412 in 2009, 2008, and 2007 -- Total corporate expenses of only ~$1mm seems reasonable for this business; it does not appear that management is milking the business 3) Management does not have a history of returning capital to shareholders (through either dividends or share buybacks)
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BSHI 11.6.10 (JT Davis Example) - SUMMARY Positives 1)...

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