Tuesday, December 11, 2012

Surging to a Large Discount

Shares of Surge Components (SPRS) are extremely cheap. The company is profitable, but still trades not much above its net cash level. I first came upon the company following this tweet from value investor Paul Sonkin:

"Just driving back from the SPRS annual meeting. Pretty interesting - $5m market cap, $3m cash earning $1m per year"

(By the way, if you're not on Twitter or not following me, shame on you!)

Since that tweet, the market cap has fallen to $3.6 million, making the company even more appealing. The company has been discussed already at Whopper Investments and OTC Adventures, so I don't have too much to add. I will say in addition to what those guys already covered, however, is that the company has discussed announcing a plan for its cash by December of this year, which could be either good or bad for shareholders:

"We are currently developing a strategic plan for our future, which will include a plan for the use of a portion of our cash. We expect to complete development of this strategic plan by the end of the year."

So we could see a fiscal cliff dividend, or we could see the company go on some sort of spending spree, or both or neither. You can also file this one in the category of deadbeat share repurchasers. This is what the latest (2012) quarterly report from the company had to say on the topic of buybacks:

"In November 2002, the Board of Directors authorized the repurchase of up to 1,000,000 Common Shares at a price between $0.04 and $0.045. The Company has not repurchased any shares to date pursuant to such authority."

The market price of this company has been in that sweet spot for years at a time since 2002. Yet the company has repurchased not a single share despite a massive cash stockpile relative to its market cap. Is that a new record for longest "intention" to buy back shares without actually doing so?

Obviously, Surge is a cheap stock. But whether that is warranted by management's actions, I guess we will soon see!

Disclosure: Author has a long position in shares of SPRS


johnny said...

Was digging this stock until I got to this part:

"The agreements further
provide that in the event of a change of control, as defined, or a change in ownership of at least 25% of our issued
and outstanding stock, and such issuance was not approved by either officer, or if they are not elected to our board
of directors and/or are not elected as an officer, then such officer may elect to terminate his employment agreement.
If he elects to terminate the agreement, he will receive 2.99 times his annual compensation (or such other amount
then permitted under the Internal Revenue Code without an excess penalty), in addition to the remainder of his
compensation under his existing employment agreement."

That essentially accounts for the $3 million cash balance. It disappears at their option, according to the employment agreement. Sounds like you're pretty much dependent on management doing something intelligent, since they're pretty well-protected from any outside influence.

Nat Hunt said...

Well the stock has about doubled since then.