Wednesday, April 7, 2010

Vicon Industries

Vicon Industries (VII) sells video surveillance equipment. The company trades for just $23 million, but has cash of $15 million, current assets of $36 million, no debt, and total liabilities of just $9 million. In addition, the company owns a couple of buildings (one in NY State, and one in England), which are carried on the books for over $6 million. As such, from an asset point of view, the stock looks compelling. But the earnings picture is not so clear.

The last business cycle was not kind to this company. Vicon appears to operate in an extremely competitive industry, as there are constant downward pricing pressures that result in tiny or negative margins. A large chunk of revenues must be spent on R&D just to keep up with the competition, some of which are several times larger than Vicon.

The company derives much of its revenues from installations in newly completed buildings and renovations, which makes Vicon's business cycle lag that of the general economy. (Since recently completed buildings still need security during recessions, the company had been profitable up until the last quarter. But since few building/renovation projects are started during recessions, Vicon sees its revenues drop a few quarters later, when those buildings would have been completed.)

As such, the company hit a wall in the last calendar quarter of 2009, as the lack of newly completed buildings/renovations finally caught up to the company: sales (year-over-year) were down almost 30% to $11 million. However, the company's situation is not as poor as the sales record would indicate. While the company's sales were just $11 million, it recorded orders (i.e. future revenue, likely) of over $13 million for the 2nd straight quarter.

The company appears willing to use its cash reserves to prop up its share price, as the company has been buying back shares at a decent rate, with plans to continue to do so. An important caveat, however, is a pending lawsuit on the company for patent infringement; to its credit, the company has been successfully defending itself, but the plaintiff continues to escalate its appeals.

The stock does have a margin of safety from an asset point of view. But both the long-term and short-term earnings situations are murky (thanks to the competition and the cyclical situation, respectively), making this a tough decision for value investors!

Disclosure: None


Anonymous said...

Interesting and informative as always .... Can u tell me what screening websites u use to find potential investment.... Thanks in advance... Keep up the good work....


Considering from just a liquidation view point ,this looks doesnt it?
(ie are their any more ways than those u ve already pointed out to screw up if the stock is bought on basis of liquidation value?)

Saj Karsan said...

Hi Anon,

I do use some asset screens and some ROE screens. I find google finance screens quite useful. 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!

Hi Spaced Out Guy,

I'm sure there are many ways that liquidation plays can be screwed up. Unfortunately, I don't know if it's possible to come up with an exhaustive list; you just have to stay on your toes and try to apply logic to the situations you come across.