Monday, March 23, 2009

Buybacks Still Exist?

A couple of years ago, companies were spending hand-over-fist on a slew of director-approved share buybacks. Now that stocks have fallen to the point where companies would get much more value for their buybacks, one is hard-pressed to find any companies confident enough to buy back their shares. One company bucking this trend is TAT Technologies (TATTF), a provider of services and products to the aerospace industry.

TATTF managed to improve its year-over-year operating income in the fourth quarter in part due to the fact that it holds certain medium-term servicing contracts with many of its customers, giving it some revenue certainty. Net income for the year was over $4 million, while the company's market cap sits at just $30 million.

But the most attractive aspect of this investment is the discount it sells at relative to its balance sheet. TATTF is a Ben Graham net-net, with current assets of $108 million ($45 million of which is in cash) and total liabilities of just $41 million.

TATTF is a small-cap which is closely held and controlled by one shareholder, which poses some added risk. But as part of a diversified portfolio, it may offer investors terrific value at this price.

Disclosure: Author has a long position in TATTF


Anonymous said...

thanks for your posts. i'm a daily reader of your blog.

just one quick question, why do you think a single shareholder holding a majority of the share of the company a 'added risk'? I somehow have the impression that if the management (CEO) is a majority shareholder, it'll be even better because the management's own wealth is tied to the performance of the stock... humm, just like to hear your thoughts.. =) thank you

Anonymous said...

Thanks for the idea. RACK is another cheap stock with a recently-enacted, large buyback.

Today's environment is a great one for assessing a management's ability to allocate capital. In boom times when flush with cash, everyone buys back stock; now though is when we see the truly disciplined management emerge.

Saj Karsan said...

Hi Anon,

You are right that you want management to be a significant shareholder. However, a majority or controlling shareholder (whether management or not) does bring some additional risks, due to the potential for conflicts of interest.

The controlling shareholder is not answerable to other shareholders whose sole goal is likely generating returns on capital. Therefore, the controlling shareholder is more likely to pursue his own goals which may be different than those of minority shareholders. For example, he may push pet projects that increase his political power or standing in the community. He may also use the company to buy products/services (e.g. generate consulting fees) from his other ventures, which increase his wealth at the expense of minority shareholders.

Anonymous said...

Thanks much Saj for the response!! Guess significant management ownership sometimes can be a double-edged sword. =)

BTW, I'm not Anon, but I'm a frequent reader of this blog from China. You can call me 008. ^_^

Saj Karsan said...

Hi 008,

I can't tell that it's you posting, because it says you are an "Anonymous" poster (hence I called you "Anon"), as anyone can post under that name.


Anonymous said...

What do you make of their entire structure? They seem to have a stake LIMC, which does the aircraft maintenance. They also have a stake in some Israeli defense company that the majority shareholder has a stake in as well. I can't seem to sort through the web of holdings to figure out what/if anything this company does.

Saj Karsan said...

Hi Anon,

Yea there are some significant subsidiaries (e.g. Limco, which makes up a large part of revenue and earnings for TAT) and some complex recent transactions. TATTF also just made a bid to buy out the remaining portion of Limco, so it appears it will soon own that company outright.