Adaptec (ADPT) continues to show up both near the 52 week low list, and as a net-net. The guru trades around this name prompted me to take a closer look. Mario Gabelli has been buying, most recently on November 15, 2010, and now owns about half of one percent of the company. On the other hand, Richard Pzena has been selling, although he still owns more than one percent of the company. Michael Price sold out of his position late last summer, and John Rogers bought in the second quarter and sold out in the third. Donald Smith also is an owner, but hasn’t made any recent trades. All of this trading activity is unique for a $327 million company.
Adaptec historically was a California-based data and digital content storage provider. That was in the past, although they still operate their legacy business. In the future, they’ve announced that they’re looking for new businesses to buy into. They want to deploy their cash, or sell themselves. My preference is for them to sell themselves but that doesn't appear to be happening.
Adaptec is a net-net, which should provide downside protection if you buy at today’s prices. They’ve got cash and short-term investments of $366 million, not counting accounts receivables, long term debt of $9 million, not counting accounts payable, for a net of $357 million. They’re market cap is only $327 million. They’ve also got other current assets of $14 million that I’m not even including in this cursory overview.
So, where’s the value? In addition to being cash rich, they own patents that some analysts have pegged to be worth $60 million. They also have tax credits that may be worth something if they sell themselves or may be applicable if they even become profitable again.
Steel Partners bought into the company a few years ago and agitated for change. They now own about 32% of the float, hold some board seats, and effectively control the company. They’ve had the opportunity to make some changes over the past few years, but we’re still waiting for proper monetization of the assets. This relatively slow pace may be what frustrated Price, Rogers, Pzena.
The best possibility here, in my opinion, is for a sale. I know Steel Partners was working with an investment banking firm a few years ago to sell Adaptec, but nothing came from it. I don’t like the idea of them trying to go out and acquire new businesses, but the fact is that if they made an acquisition that was immediately accretive to earnings, it would probably provide a pop to the stock.
I peg the minimum value at $3.21 based on cash and investments alone. If you add in the supposed value of their patents, you’re up to $3.75. What kind of buyout price could we see? It would have to be above those two prices. You’d like to think that Steel Partners thinks they could redeploy the cash with at least a 15% return or they wouldn’t make the purchase. That leads me to a share price in the $5 range. Maybe that’s why there hasn’t been a sale yet. Either way, under any of these scenarios, the shares are at least 10% undervalued and potentially 80% undervalued.
Editor's Note: You can access the list of Net-Net stocks here with Ben Graham Net-Net Screener. GuruFocus also publishes a monthly Graham Net-Net newsletter which provide in-depth analysis of a Net-Net company.
About the author:
Steven KielSteven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at email@example.com or through the firm's website at www.arquitos.com.