Wednesday, March 24, 2010

Licking Up The Profits

Blonder Tongue (BDR), a manufacturer of cable tv electronics, is a stock idea with some interesting elements to it. While the company has had a difficult time making money in recent years, it has begun shifting much of its production overseas, which should make it more cost competitive. However, it's not the company's earnings situation which makes this stock appealing, but rather its assets.

Blonder Tongue trades on the AMEX for under $7 million, but has current assets of over $14 million against total liabilities of under $6 million. In addition, the company owns several acres of land at its manufacturing site which is likely worth a few million dollars. Furthermore, the company has classified $4 million of its inventory as long-term (and therefore is not included in current assets) because it doesn't expect to sell it this year. While the risk of obsolescence in an industry such as this one is high, this extra inventory is offered to the current investor for free, since the company trades at a discount to its net current assets.

The most troubling thing about this company, however, is how its CEO manages money. Not so much the money within the business, but the money in his personal life. You see, CEO James Luksch declared bankrtuptcy less than a year and a half ago.

Should this kind of information be relevant in assessing a manager's on-the-job ability? It would certainly appear so. If one can't safely manage finances in one's own life, how can one be expected to do so for a public company?

It gets worse, however. Luksch had taken out interest-free loans from Blonder Tongue before declaring bankruptcy. Luksch's daughter and son-in-law are also executive officers of the company, and therefore the CEO's personal business is clearly company business; he has made it so!

In deciding whether to try to take advantage of this opportunity, investors will have to weigh the company's compelling price relative to its net assets against the murky earnings outlook and weak track-record of the chief executive officer.

Disclosure: Author has a long position in shares of BDR


twitter user: @valuestocks said...

Hi Barel,

I looked at this company quite a while ago. I was also attracted to its strong asset base. I think another thing to mention here is that they are transitioning to service IPTV markets.

Some information about the IPTV Market that may prove important to Blonder Tongue:

According to IMS Research, Global IPTV subscriptions should top 65M by 2012, a sizeable increase from the 13M households worldwide that were receiving broadcast via the Internet in 2008. Growth in the IPTV market will be driven by several factors including:

1. Growing offerings by tier one and rural telcos in the Americas and Europe *This has already started in the US with both AT&T and Verizon offering IPTV services along with SureWest. In Europe, adoption of IPTV seems to be growing more quickly than in the US with providers like Deutsche Telecom, Telefonica and British Telecom offering IPTV offerings.
2. More choices in content through IPTV-based services *This has also started to take shape with viewers having access to a more customizable viewer experience through advancements in technology which allow IPTV access on platforms like Android.
3. Growth of IPTV in Asia as China and South Korea *I don't have figures on IPTV in Asia but I think it is safe to assume that if growth hasn't kicked into high gear there yet, it surely will.

Shipment of stand-alone set-top boxes will grow to 21 million from the 4.7 million set out in 2006, with hybrid STBs, particularly satellite/IP boxes, seeing even more rapid deployment to the tune of 39 million units in 2012.

Much of the growth, will be the result of falling prices for STBs, as chipmakers integrate multiple codecs into single chips, competition, bandwidth upgrades and an evolving consumer base that will move away from DVD to HD boxes. Increasingly, HD boxes utilizing the MPEG-4 AVC codec will replace older SD boxes. MPEG-4 AVC is also being incorporated immediately into many new deployments, and MPEG-2 IP STB shipments are forecast to begin decreasing in 2010.

Anonymous said...

Hi Barel - I was wondering if you could share with your readers your process for idea generation. Do you have favorite screens? A watchlist of some sort? You have written about a lot of interesting, obscure names ... just curious how you first stumbled upon them. Thx

Saj Karsan said...

Hi Anon,

I do use some asset screens and some ROE screens. Also, many of my ideas come from other value sites and other value investors. Furthermore, as this site has grown, I also get many ideas from readers!

Anonymous said...

This might not mean anything to you, but I'm pretty sure Ben Graham would be proud of an analysis like this.

Saj Karsan said...

Thanks, Anon! I appreciate it!

aagold said...

Ben Graham would be proud of this analysis?

Umm... I'm kind of baffled here. Apologies in advance if this sounds rude, but if the red flags you pointed out aren't blatant enough to give you pause before investing in this company, what *would* scare you away?

Let's see - first of all the CEO uses the company to supply himself with interest-free loans... ok ... isn't that rather unethical? And then he declares bankruptcy and (presumably) stiffs the company? And yeah, having his daughter and son-in-law as executive officers doesn't look that great either.

I don't know... there are a bunch of other net-net's out there to pursue, don't know why you'd gloss over such bad-sounding stuff.

- aagold