Monday, February 8, 2010

Hardinge Makes It Easy

Last week, Hardinge (HDNG), maker of precision machinery, received a cash offer for its shares that was a 45% premium to its closing price on the previous day. Predicting when such offers are going to occur is a difficult task indeed; but to make money, the investor needn't be clairvoyant: Hardinge has been on our Stock Ideas page for the last four months because of the discount it traded to its assets.

Hardinge's poor stock performance was a result of the company's poor operational performance over the last business cycle, as previously discussed. But the market's reaction was clearly overboard. As a result, investors were basically offered a stock with strong upside potential and minimal downside risk.

The offer came from a private company in Brazil that operates in a similar line of business. This company is looking to buy Hardinge in its entirety for an absolute steal: the bidder has offered to buy the company for about $90 million, which is not much more than Hardinge's net current assets! The company's fixed assets (which are substantial in this line of business, with a book value of $180 million!), access to the company's markets, customer relationships and engineering know-how would all be thrown in for free!

As can be imagined, Hardinge management is not co-operating with the buyer and will likely come out with a release stating that the offer grossly underestimates the company's value. Recognizing that this would occur, the bidder is likely ready to make a higher offer to appease shareholders and/or receive management's blessing. As a result, the stock price actually currently exceeds the current offer!

But while the bidder and Hardinge management battle it out to determine a fair price for the company, it should be noted that those who invested before the bidder showed up are the real winners. Catalysts are not always visible, and when they are, most of the price appreciation will have already occurred. Investors who simply focus on buying companies that trade at large discounts to their values put themselves in positions to generate outstanding returns.

Disclosure: Author has a long position in shares of HDNG

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