Monday, October 17, 2011

Gaming Partners Cashes In

Value investors love companies with lots of cash. At the very least, a net cash position protects a company from going under when times are tough. And during good times, the cash can be doled out to shareholders. But whether a cash distribution (or buyback) will actually occur is worthy of investigation before the investor actually takes a position, for many companies have no interest in actually returning cash to shareholders.

Consider Gaming Partners International (GPIC), a manufacturer and distributor of gaming chips and other casino-related supplies. The company has $27 million in cash against virtually no debt, and has generated operating cash flows of $23 million in just the last three years. Despite this, it trades for just $50 million, making it a value candidate. The company's attractive business attributes have been summarized well already at and at Value Uncovered, so rather than regurgitate the details, I'll just point you there (here and here).

But while the company's earnings power appears to be strong and growing, a big part of this company's value lies with its net cash balance, which makes up more than half of its market cap. Unfortunately, there appears to be little to no chance of shareholders seeing the better portion of that cash.

This is because the company has made it clear both through its actions and its words that it will be using the cash for acquisitions. Gaming Partners recently acquired a company, and stated its plans to do more:

"In April 2011, we purchased certain assets of OMC SARL and its subsidiary OMC Industries (“OMC”), a private French-based manufacturer of high-quality plastic injection molds. The acquisition is part of our overall acquisition strategy to use our cash position to acquire companies, products, or technologies that enable us to diversify and grow our product and service offerings."

More acquisitions appear on the way. From the most recent quarterly report:

"We are also actively seeking strategic business acquisitions and partnerships that will complement our current product offerings."

Finally, with this statement, the company is making it very clear it considers (whether true or not) the bulk of its cash (some $16 million) to be stuck overseas:

"Our ability to permanently transfer cash from GPI SAS, our French subsidiary, to the United States is restricted due to unfavorable tax consequences and profit retention requirements under French law."

Even if shareholders wanted to stage a coup and force management's hand, they couldn't. The company is 49.7% owned by one person. If you can't convince her of the merits of distributing the cash, it's not happening.

There's nothing wrong, of course, with a company making acquisitions instead of returning its cash to shareholders. It just increases risk for the value investor. Who knows what the money will be spent on? This uncertainty makes it difficult for the value investor to know he is getting a bargain price.

Companies flush with cash make for great value candidates. But to avoid any nasty surprises, be sure you investigate management's intentions for that cash. As we've seen before, today's cash can become tomorrow's Goodwill!

Disclosure: No position


Ankit Gupta said...

I think the counter argument could also be that if someone owns nearly half of the business, they know how hard it is to operate a business with results that are this good. They earned all that money by working hard, so they will have a strong reason to not waste it on value destroying acquisitions.

(I haven't dug into this business and so I can't say if I believe that to be the case)

Anonymous said...

Well, this seems to suggest that a company owes its stockholders gains in the form of dividends or some other type of distribution as a matter of preference OVER growth.

Warren Buffett's company, Berkshire Hathaway, doesn't dole out dividends (I think). Do you disapprove of their acquisitions too?

Anonymous said...

There are several companies trading at least 50% cash (GENC, GVP, etc).

I have owned or own currently some of them.

GPIC has been on my watchlist for years. I like the industry (gaming chips especially, as chips will be replaced on continuous basis) and I like that GPIC is one of the market leaders.

I have a small position in GVP. Except for the industry, wery similiar to GPIC.

As you mentioned, problem with these companies is that you never know what they will do with the cash. What you get is a value trap.