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Perceptron's Perception

October 13, 2011 | About:
10qk

Barel Karsan

17 followers
Perceptron (PRCP) sells measurement and inspection products that are used by a range of customers from car manufacturers to plumbers. This is a profitable company with a ton of cash (relative to its market cap) and no debt, making it a stock with strong value potential.

While Perceptron trades for $45 million, it has cash of just over $23 million (after subtracting what it has agreed to pay from a recent legal settlement). Meanwhile, the company earned almost $2 million last year, as revenues began to recover after their dramatic falloff during the recession. The company's recovery seems poised to continue as well, as the company's backlog is up significantly year-over-year and represents almost two quarters' worth of revenue. (Interestingly, the current backlog is higher than the company's market cap ex-cash!)

Investors at the current price are also getting a discount of almost 20% to tangible book value. Furthermore, the company has been buying back shares, having spent nearly $3 million in its last fiscal year on share repurchases at prices slightly higher than today's price. The fact that the company's CEO owns more than $1 million worth of shares (against a pre-tax salary of just over $300K) suggests this activity may continue if the share price stays low.

But it's not all rosy for Perceptron. For one thing, it's got a lot of European exposure (more than 30% of sales). Considering Europe's current preference for government austerity, soft demand could hurt results in the near-term. However, Perceptron's lack of debt and strong cash position mitigates any risk for long-term investors.

Speaking of the cash position, there's maybe a little too much of it on the balance sheet. It has been sitting there for about six years, not really earning a whole lot for shareholders in the interim. This is likely part of the reason the company trades at a discount. A dividend is likely out of the question, as insiders hold a lot of options that wouldn't see the light of day if a meaningful cash distribution were to take place. There are a whopping 1.1 million options outstanding against a share count of just 8.5 million, though some options are out of the money.

In addition, the company faces some risk as a result of the makeup of its customers. Two large auto manufacturers (Volkswagen and GM) accounted for 32% of Perceptron's sales last year. This reliance for a large part of revenue from just a few customers is part of the reason the company's sales fell so dramatically during the recession. As has been discussed on this site before, customer concentration is a serious risk.

Finally, there's also a $4 million lawsuit outstanding against Perceptron. Unfortunately, the company's annual report contains little in the way of details of this dispute, other than that the "suit alleges that the Company breached its contractual and common law indemnification obligations by failing to pay for component parts used to manufacture optical video scopes..."

Perceptron is a cash-rich company that trades at a discount to book and at a low multiple to free cash flow ex-cash. However, it remains to be seen if the cash will be put to a use that will benefit shareholders.

By the way, this company's management may be amenable to an interview, so if you've got any questions, feel free to comment on this post as you may just get an answer.

Disclosure: No position

About the author:

Barel Karsan
GuruFocus - Stock Picks and Market Insight of Gurus

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