Tuesday, January 12, 2010

FORD: Not About Trucks

Forward Industries (FORD) makes carrying cases for a variety of products from cell phones to medical devices. The company has $20 million of cash and just $2 million of liabilities, yet it trades for just $15 million. Unlike other companies in this position, it is not burning cash, as it has managed to get the business to a more or less break even level. In addition, the company has a few million dollars worth of other current assets as well (in the form of A/R and inventory).

Unfortunately, there are some elements which reduce this stock's appeal as a potential value investment. These elements all have to do with management's intentions. Usually, a company that hasn't made money in the last three years would serve as an acquisition target. In this case, however, management is intent on being an acquirer! The company has hired an investment bank to help it find potential targets, meaning management is itching to spend some of the cash it has on hand.

Why might management not be interested in making a move that would increase share value (e.g. a special dividend, share buyback, or sale to another company)? One reason is the company's incentive scheme. Unfortunately, management's annual salaries represent several times their ownership stake in the company! As such, management is likely more interested in preserving their jobs and growing the company so that its reputation, status and salary continues to grow.

Management also appears cognizant that a large number of shareholders are opposed to acquisitions and would prefer the cash to be paid out. This can be seen by the way management is trying to alter the corporation's articles to reduce the number of shareholder votes necessary in order to approve an acquisition (Voting Item #3)!

Sometimes, a company can look like a value play, but management's incentives are not aligned with shareholders, and as such reducing the gap between price and value is not a priority. In such situations, investors may wish to steer clear or demand a larger margin of safety.

Disclosure: None

1 comment:

Nick Gogerty said...

Nice story. this is the kind of analysis that makes common sense. typical finance would look at the VaR etc. and probably allocate to what is basically a bet on a management team making an unknown bet. the uncertainty in the investment is very high and would make no sense.