Friday, June 3, 2011

Meade's Discount Instrumental

Meade Instruments (MEAD) is a company that has lost money for years. Its business of designing and manufacturing telescopes and other optical consumer products is on the decline. But after some restructuring and new management, the company now finally appears to be returning to profitability after many long years. Despite this, the company trades at about half of its net current asset value, giving investors the opportunity to profit from this apparently turned around company.

After hemorrhaging cash over the last few years, the company finally managed to be free cash flow positive (albeit in a very small way) in fiscal year 2011. Production has been moved from California to Mexico, poorly performing units have been divested/discontinued and new products have been brought to market. The result is a company in good financial shape with no debt and $5 million of cash. Meanwhile, the company trades for just over $5 million, despite current assets of $14 million and total liabilities under $4 million.

In addition, the company's losses may be overstated. It appears the company is rather conservative with its accounting, as fixed assets have been largely written down through years of depreciation, but are still in use. Meade's property, plant and equipment account is now smaller than the company's depreciation charge for last year, while the company "had no material capital expenditure commitments at February 28, 2011."

You wouldn't be alone as a value investor in this company as Paul Sonkin is also an owner. Sonkin's Hummingbird Management owns more than 15% of this company, and Sonkin has been a director of the company since 2006. The company's CEO also owns 10% of the company.

Meade has come a long way since it was first discussed on this site, but there have been a few updates at ShadowStock tracking its progress. See here for more on Meade from ShadowStock.

Disclosure: Author has a long position in shares of MEAD

9 comments:

Anonymous said...

The company is still losing money though, how do you expect this to change? No div payments or share buybacks... and took a pop in price today. Not sure this is such a good long at these prices.

Floris said...

I dont think it actually lost money during the last quarter of its fiscal year, which should be logical considering the restructuring and the improving sales are working through the P&L.

Saj Karsan said...

Hi Anon,

Floris is right; it made money in the 4th quarter. Also, it is dealing with some legacy stock compensation expenses which are pushing down income artificially. I agree the price rise lowers its attractiveness though.

Taylor said...

MEADE also has about $100 million of state and federal NOL's (almost 20x the market cap), which could be very beneficial should the turnaround be successful.

Greg said...

Some thoughts and questions:

1) Their results are highly seasonal and they discuss this, does that bother you in when you take your position and how you value them?

2) They have large reliance on their existing customer set.

3) The discretionary nature of their product leaves them really exposed in the event of a downturn.

4) .3 mil/year and .3 mil /year on their office and factory, is .6 mil a year in lease commitments.

Saj Karsan said...

Hi Greg,

1) Seasonality does not bother me, no
2) Agreed, but its not overly ridiculous reliance by any stretch
3) Exposed to temporary drops in revenue and losses yes, but in terms of financial position they are set up to outlast any downturn

Anonymous said...

Hey Saj,

I came across something in Mead's financials that I am unclear on. Specifically in regard to their PIPE funding and whether or not they satisfied the liquidated damages clause of 1.5% per month on 6 million in the registration statement. I'm not sure whether I am being paranoid but as the group of investors has subsequently replaced management and seems to control the board it does seem possible to me that this is a potential value play for Hummingbird and other investors involved (also share prices plummeted shortly after the offering prior to the reverse split). I'm unfamiliar with how any liquidated damages would be reflected in the financial statements. Please see quote taken from the definitive proxy statement and let me know what you think.

On August 24, 2007 (the “Closing Date”), the Company entered into a Purchase Agreement (the “Purchase Agreement”) with five institutional investors (the “Investors”) pursuant to which the Investors purchased in a private placement 3,157,895 shares of the Company’s common stock, par value $0.01 (the “Common Shares”) (or 157,895 Common Shares as adjusted to reflect the Reverse Stock Split), at a purchase price of $1.90 per share (or $38.00 per share as adjusted to reflect the Reverse Stock Split). Gross proceeds from the sale of the Common Shares were approximately $6.1 million. Three of the Investors (the “Hummingbird Investors”) are controlled by a director of the Company, Paul D. Sonkin, through his management and control of Hummingbird Capital, LLC, the general partner of the Hummingbird Investors. The Hummingbird Investors purchased in the aggregate 526,316 of the Common Shares (or 26,316 Common Shares as adjusted to reflect the Reverse Stock Split) and paid a purchase price of $2.00 per share (or $40.00 per share as adjusted to reflect the Reverse Stock Split) (or an aggregate purchase price of approximately $1.1 million) in accordance with applicable rules of the NASDAQ Stock Market. The approximate dollar value of the amount of Mr. Sonkin’s interest in the transaction is $45,000. Prior to the sale of the Common Shares to the Hummingbird Investors, Mr. Sonkin beneficially owned approximately 15.6% of the Company’s common stock.
In connection with entering into the Purchase Agreement on August 24, 2007, the Company also entered into a Registration Rights Agreement with the Investors (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement a registration statement was filed with the Securities and Exchange Commission (the “Commission”) and declared effective covering the resale of the Common Shares. Subject to certain exceptions if sales cannot be made pursuant to the registration statement, the Company must pay the Investors 1.5% of the aggregate purchase price of the Common Shares for each 30-day period (or portion thereof) during which sales under the registration statement are not permitted.

Tim

Saj Karsan said...

Hi Tim,

My reading of that statement suggested there was a penalty for the company to pay if the investors group is not able to legally sell its shares. Since it has been several years and the issue hasn't come up, I had ignored it, but you could be right that this represents an unaccounted for liability.

TWD909 said...

Saj,

Thanks for the reply and great job on the blog. I'm fairly new at analyzing financials so when I come across something like that I am not always sure how to delve deeper and figure out whether I am reading something incorrectly or not. If you have any advice on resources that could help address similar issues I would appreciate the help. If you investigate it further please let me know what you find.

Tim

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