Monday, May 16, 2011

Vicon: Activist Murmur

Usually, value investors will want to invest alongside management. If management has skin in the game, the thinking goes, their interests will be aligned with those of the remaining shareholders. But it doesn’t always work that way. Sometimes, management’s motives, despite high ownership levels, are not financial. Managers may seek to grow in importance and reputation by presiding over larger, more recognized firms. This may be occurring at Vicon Industries (VII), a company that has been discussed on this site as a potential value investment.

Since the recession, the company’s stock has consistently traded at a significant discount to its net current assets. But despite a cash hoard of $14 million against a market cap of just $21 million, the company pays no dividend and has been agonizingly slow to buyback shares; in all of 2010, the company bought back just $850,000 worth of stock!

Further management apathy appears to be taking place in the company’s operations as well. Despite a downturn in the company’s industry, Vicon’s expenses are higher now than they were a year ago. Instead of cutting costs to align expenses with revenues, the company continues to lose money.

The company’s inaction appears to have caught the interest of a couple of activists. As noted at, more than one major investor has expressed a lack of enthusiasm for management’s present course. In a recent filing, one of these investors notes the following:

“[We] believe that [Vicon] is retaining an excessive amount of liquidity on its balance sheet for no apparent reason, that its shares are materially undervalued due, at least in part, to this unproductive retention of capital..."

As noted by Frank, this could be the start of a process that allows shareholders to finally benefit from the company’s value.

Unfortunately for outsiders looking to influence management’s actions, however, the company’s executive team owns almost 18% of Vicon. In this case, it might be better for shareholders if insiders did not own such a significant percentage of the company!

No factor about a company (whether it has low or high margins, low or high returns on capital, or low or high management ownership) can be viewed as a positive or a negative in isolation. Rather, each factor must be examined within the context of the entire company. In this particular case, management ownership does not appear to be resulting in actions that benefit shareholders. As such, shareholders may benefit from the actions of activist outsiders who are seeking a remedy to the company’s languishing share price, but management may still stand in the way.

1 comment:

Anonymous said...

I struggle with the idea that the revenue declines were due solely to the recession. This company must be losing (or have lost) any competitive edge to see revs decline that much. The security industry is more resilient than most and many remained flat or grew during the downturn. This stock is definitely cheap but i'd want to be certain the revenue bleed has stopped and fully understand the true reason for the downward spiral.