Wednesday, May 30, 2012

Value Fail: Blonder Tongue

When I buy a company trading at a discount to its net current assets, I don't expect operational miracles; obviously, the company is trading at a discount for a reason. But ideally, a company is that not earning a decent return on its capital does not continue to invest and try to grow. In that respect, Blonder Tongue has become an investment of nightmarish proportions, forcing me to sell all my shares at a loss.

Regular readers of this site will recognize the company, as it has been mentioned a few times here. In fact, the company has already made it to the Value In Action page once, thanks to a 70% jump in 2010. Since then, the stock had fallen considerably, once again becoming a Stock Idea in mid-2011. But things have not gone in the right direction since, in my opinion, and therefore I'm throwing in the towel.

If a company you manage (and own, to a large extent) has trouble making a profit, you would probably do well to shrink the business, pruning the areas that are cash flow drains. In addition to being accretive to cash flow, this has the additional benefit of allowing you to monetize assets (receivables, inventories, buildings etc.) that are otherwise tied up supporting loss-making activities.

But try telling this to the chiefs at Blonder Tongue, who just dropped $7 million (which is more than Blonder Tongue's own market cap!) acquiring a company in the same dismal industry. As a result, Blonder Tongue has saddled itself with a bunch of debt, and severely reduced the discount to its net current assets. To add insult to injury, the combined companies posted a $1.5 million loss in their first quarter together.

Perhaps I should have seen this coming. The company's CEO has proven to be not-so-adept at financial proficiency, having filed for personal bankruptcy in 2008. The company's COO, on the other hand, has been known to spend time questioning the masculinity of some of the members of Yahoo!'s message boards (so I can probably expect to receive an unkind word or two following this post)!

But in fairness, I wasn't expecting a whole lot out of these upstanding members of society. Maybe a sale to a competitor (the CEO is 81, after all), maybe shrinking to its most profitable products, maybe cutting expenses such that profits rise a little bit, or maybe a payday loan for the CEO to pay back the company. The company had not made such a large acquisition before, and hadn't been willing to carry this much debt since 2002. But alas, this large, debt-driven acquisition occurred anyway, leaving me holding the bag.

That's not to say they can't still make it work. They very well might; I just prefer the odds elsewhere.

Part of me actually wants to stick it out, in order to see if the company can actually turn a decent profit and get the stock price back up. But I chalk that up to the natural human tendency not to want to crystallize losses (a.k.a. loss aversion) and therefore the accompanying increased willingness to gamble on the chance that sure losses can be avoided.

But when I force myself to ignore that feeling by forcing System 2 to get involved, I'm left with the undeniable (or so I think) conclusion that I would be better off putting this money to work elsewhere. I can buy a similarly suspect company for a much better discount, or I can buy a much better company for a similar discount, both of which are much more appealing options.

Disclosure: No position


Tyler said...

I looked into this company a little while ago and passed due to the CEO's financial woes, and I think the company was loaning him money as well. Too many red flags, I'd move on, but then again, I am not a current shareholder.

sinletter said...

Interesting reference to "System 2". Have you read Thinking Fast and Slow by Daniel Kahneman? I am slowly working my way through it.

Saj Karsan said...

Hi sinletter,

I'm reading it right now as well! As you can see here:

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