Monday, July 2, 2012

LGL Group: Upside with Protected Downside?

Just over a year ago, electronic component maker LGL Group (LGL) issued shares at a price of $20/share. Today, shares of the company sit at under $7! Because of the dramatic fall in the stock price, investors are potentially offered an opportunity to invest with limited downside risk.

LGL group makes frequency control devices (e.g. components of electronic clocks) as a small player in a competitive industry. The income and cash flow statements are nothing to get excited about; sometimes the company makes money, sometimes it doesn't. You might expect a company like this to barely earn its cost of capital over the long term.

But at the company's current price, you're getting to buy the assets for a lot less than they appear to be worth. The company's market cap sits at just $17 million despite a net cash balance of over $10 million, net current assets of $17 million, and a book value (all tangible) of $25 million.

The company's book value may also understate the market value of some of this company's assets. LGL has been carrying land and buildings for a number of years on its books, comprised of 11 acres (including a 28,000 sqft building) in South Dakota and 7 acres (including a 71,000 sqft building) in Orlando, Florida.

Also of note for value investors is that Mario Gabelli (whom you can follow on twitter here) is a major shareholder of this company, and his son is on the board. Gabelli has recently stepped up his purchases as the share price has plummeted. He is part of an insider group that owns 37% of the company. When insiders are shareholders, it is usually a good sign for the rest of shareholders, as interests are aligned. (e.g. you are less likely to see the spending of corporate assets just for the sake of risky growth.)

The operations of this company leave a lot to be desired. But downside risk protection appears present to a large extent. As such, investors are offered an opportunity to participate in any upside that may occur here while being protected by tangible assets on the downside.

Disclosure: No position


Anonymous said...

It's going to use that cash to acquire another company, so I'm not sure I'd say there's little downside here.

Also, Mario Gabelli's son, Marc, is a director, but Mario is not. Mario has been involved with the company since the 1980s and is a large shareholder so he clearly has an interest in the company.

bamboo investments said...

I think think this could be an intriguing buy. I do agree that downside is quite limited. $10 million of cash is already almost two-thirds of the current market cap. Plus, if Gabelli is a major shareholder, then that means your interests' are aligned with his - not a bad place to be.

Saj Karsan said...

My mistake, anon, thanks for letting me know. Corrected to reflect son is director.