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Solitron (SODI): a Net-Net with Valuable NOL

July 10, 2012 | About:
whopper investments

whopper investments

49 followers
I’ve recently been adding to my position in Solitron (SODI). The more I revisit the stock, the more value I think there is.

So let’s start this post off with a quick recap. Assuming all options are exercised (and they will be, since their strike place is way below today’s share price), SODI has under 2.5 million shares outstanding. With its current share price drifting about in the $3 range, that gives it a market cap of approximately $7.5 million.

For that $7.5 million, you are getting 3 things.

  1. A cash pile of $7.6 million dollars (the company has no debt), which actually understates their cash pile per share because I’ve used diluted shares but given them no credit for cash from option exercise (small adjustment though).
  2. A business that did almost $750,000 in EBIT last year and has averaged approximately $1 million in EBIT over the past five years.
  3. Has an off book asset of over $14 million in NOLs that expire through 2031 (we will discuss these later).
You can look for holes to explain why the company is trading for (basically) less than cash despite a history of profitability. They’re tiny. They’re controlled. They include this quote in their 10-K every year:

However, due to the level of current backlog and projected new order intake (due to the status of the general economy and the shift to Commercial Off-The-Shelf (COTS) by the defense industry), the Company might operate at breakeven or at a small loss during part of the next fiscal year.
But I think the basic reason is market inefficiency — this is a tiny, unglamorous company with a strange shareholder base due to a past bankruptcy. If there was ever a place for market inefficiency, this is it.

I think there’s even an interesting twist: Nate over at oddball stocks sent a letter to the board and is organizing an “activist” campaign to get the company to repurchase shares.

I fully support his campaign, with one caveat:

I’m not sure if share repurchases, even at these depressed prices, are the best use of shareholder funds.

The reason is the company has a lot of NOLs. Those are extremely valuable, but there’s no way the company in its present form could make use of all of them.

Given that, it makes sense to do an acquisition if the company can find a complementary business within their wheelhouse. If they had an excellent capital allocator at their helm, buying stocks or bonds could make sense. Even hiring a real estate expert and purchasing income-producing real estate at a decent price could make use of the NOLs. One real interesting idea is acquiring a closed end fund at a discount to NAV and using the NOLs to shield tax distributions.

The reason is pretty simple: bBecause of their tax NOLs, SODI can be the best owner of businesses. Profit-generating small businesses are worth much more to SODI than they are to other random owners.

Now, I’m not recommending SODI go out and buy anything and everything. But I do think it would be a shame to waste those valuable NOLs. If they got desperate for ideas, I’d be happy to recommend several small businesses that would make excellent acquisitions at these prices!

Disclosure: Long SODI

Rating: 3.6/5 (16 votes)

Comments

hurstlogan
Hurstlogan - 2 years ago
Awesome article. This company of course doesn't show up on the net-net screen, so I'm curious as to how you go about finding these?

This past week I've been combing through the OTC markets and haven't really found any company with a decent balance sheet from a net-net standpoint (although I did find a astrology/fortune telling company which provided a good laugh). Also, the OTC screener is not too helpful.

batbeer2
Batbeer2 premium member - 2 years ago
>> I think there’s even an interesting twist: Nate over at oddball stocks sent a letter to the board and is organizing an “activist” campaign to get the company to repurchase shares.

They can't buy back shares till the enviromental issues have been put to rest. I think that's a possibility by H1 2013. Till then, the cash can't be returned to shareholders. I think the reason they recently adopted a "poison pill" is because the enviromental issues will be gone soon and they don't want to be pressured into something suboptimal.

As it is, I beliieve they are free to invest into something else than treasuries. I wish they would.

aashiq
Aashiq - 2 years ago
Hurstlogan - where is the OTC screener that you are referring to? Please post a URL.

Thank you
augustabound
Augustabound - 2 years ago


Hurstlogan - where is the OTC screener that you are referring to? Please post a URL.

Thank you


http://www.otcmarkets.com/stock-screener

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