Basically, the company operates two divisions- the Cues division (creates video equipment for the wastewater industry) and a restaurant division. The Cues division had been quite profitable over the past few years (operating income of $2.8m in 2010 and $3.4m in 2009), but it had been hidden by horrendous losses at the restaurant division for the past decade.
Thus, the opportunity- if the company could just get the restaurant business to break even, the value of the cues division would shine through. Remember, when the stock was trading at $1.25 last year, it’ market cap was under $6m, and even today, with the stock at $4.75, the MC is under $20m. With Cues making $3m+ in EBIT, there was significant upside in a turnaround scenario.
The big problem I saw was management had been trying literally for years to get the restaurant division under control, but operating leases had hampered their ability to close underperforming locations.
So I passed.
In hindsight, this was quite a mistake (to say the least).
If I simply go back and look at their 2010 earnings report, it’s pretty obvious (in hindsight) that the restaurant division is starting to hit an inflection point where it will no longer drag down the Cues division. Operating loss at the restaurants were way down due to continued store closure, and the Cues division was finally starting to show through.
Alas, I missed it all.
To compound my mistake, I didn’t continue to follow the company. Check this out- the company announced 3Q earnings in November. TBV sat at $4.20 per share, and net income for the first nine months of the year came in at $0.56. Despite that, as late as mid-December, you could buy the stock in the $2.20-$2.40 range (about 4x net income, and half of TBV).
But, even after missing the huge run up in the past year, that doesn’t mean there’s not still opportunity here.
ELXS came out and pre-announced record profits this week, as well as a $1.5m share repurchase (~7.5% of their stock). That seems to imply that management still thinks the stock is cheap.
And the company looks cheap as well- net income per share is going to come in a $0.94, and tangible book value sits at $4.57 per share. And net income (assuming the cues division can maintain its current operating levels, which may be a big if!) should continue to climb as they company continues to get underperforming restaurants off its books!
So, despite the big run up, the stock trades for basically tangible book value and just 5x net income… and net income should grow!
Personally, I’m passing at these levels- the easy money from the turnaround has been made, and I don’t really have industry expertise on the Cues division. But readers with a deeper understanding of it should certainly take a look- the stock continues to look very cheap, and management has certainly shown a focus on increasing shareholder value.
Disclosure- Long MHGU