Just two months ago, Sierra Wireless (SWIR), a provider of wireless solutions, was trading at a large discount to its net current asset value. With cash of $270 million, A/R of $67 million, and inventory of $33 million, the company's current assets covered its total liabilities and still leftover some $280 million. Meanwhile the company's market value was only around $90 million. Unfortunately, this enticing investment opportunity was still not enticing enough, considering the company's economics.
By Saj Karsan, Friday, May 22, 2009, 6:56 AM | circle of competence, Sierra Wireless | 0 comments »
Sierra Wireless operates in a dynamic and fast-changing field. For most investors, this field is outside their circle of competence. As such, it is very difficult to predict this company's earnings going forward. Revenues were down around 25% in the latest quarter, but at the same time they have more than quintupled in the last four years. Only investors who understand how the company's products or processes are superior can have confidence in the persistence of this company's earnings. In addition, the value of the inventory can change dramatically in this industry, as obsolescence can quickly render high-tech equipment valueless.
Furthermore, while the company listed a cash balance of $270 million, $190 million of it is restricted. The company was in the process of acquiring Wavecom with that money. Again, only an investor who can make sense of this industry can determine whether this is a good use of cash. Investors who didn't read the fine print would have been surprised to notice most of the cash balance disappear in return for equity in a company they know nothing about!
While investors who buy a diversified group of companies trading at discounts to their net current asset values will likely do very well, those who take the time to evaluate each company on its own merits can likely do better! Avoiding situations outside an investors circle of competence, and performing due diligence on a company's assets can help an investor achieve this endeavour.