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Universal (UUU) - Deep Value Net-Net Buying Back Shares

November 12, 2012 | About:
whopper investments

whopper investments

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One stock I’ve mentioned several times on this blog is Universal Securities (UUU) (most recent mention here). The lack of reader reaction to the stock has been so muted. Given the time lag and that the company’s due to report earnings this week, I thought it might be time to take another look at them.

For a bit of background, Universal Security makes smoke alarms. You can find an example of one of their smoke alarms here and their website here.

The business is, to be honest, a crappy one. Earnings for the first quarter were absolutely disastrous. However, what makes this stock so interesting is not their current earnings level.

What makes them so interesting is the sheer amount of assets that each share represents and that the company is repurchasing shares.

Consider this: Universal’s NCAV (current assets less all liabilities) comes in today at just under $4.50 per share (I’ve got it at around $4.47 to be precise). That alone is higher than today’s price of<$4.30.

But that figure ignores Universals significant investment in a Hong Kong joint venture that serves as their main supplier. That investment is worth over $13m at book value, or an additional $5.15 per share!

Put it all together, and Universal has a book value of $11.12 at June 30th (their last reporting date), meaning Universal is trading for under 40% of book value.

However, that alone isn’t tremendously interesting to me. What makes it really interesting to me is that the company is buying shares back. In their most recent quarter (first quarter of fiscal 2013), Universal bought back 1% of their shares, and I would anticipate they did so in the second quarter. While that will exhaust their current share repurchase authorization, they have a history of buying back shares when they trade at this deep a discount, and I would not be surprised to authorize another 100k or so shares for repurchase when they announce their results.

And while that’s what makes Universal most attractive to me, I do think it’s instructive to note management seems confident in their future. In the press release linked above, management notes that operating income was hurt by advertising for new products and should recover as that advertising expenses normalizes and the housing market continues to recover. Speaking of new products, Universal has released some pretty strong press releases that indicate big potential for their new products (see here and here, plus this release in response to a Today show segment that I find hilarious for some reason).

Are there risks?

Yes.

Personally, I think the biggest risk is outright fraud, given the Hong Kong joint venture represents quite a good deal of value (there’s also a disastrous acquisition in their past, and frauds tend to use disastrous acquisitions to balance their book). However, I ultimately think the risks of fraud here are quite low for a few reasons.

  1. The CEO has been with the company since the early 80s. It’d be pretty crazy if he could keep the fraud going for that long.
  2. There’s no debt, shares being sold, etc. As I’ve pointed out before, the purpose of fraud is to raise money from the capital markets. Universal is doing the opposite by buying shares back.
  3. Speaking of, I’ve pointed out that most frauds tend to show ridiculous profits. Why would Universal post the crappy financials it’s currently posting if it’s a fraud?
  4. It’s quite easy to find their products. Real products = real company.
  5. Finally (and this is probably the weakest one), the company is audited by Grant Thornton, a pretty respected shop, not some no name auditor.
All in, I don’t think fraud is at all likely.

My more realistic concern is executive compensation. The top 4 executives took home >$1.3m in comp last year and have a pretty outrageous bonus structure (see at the bottom of p. 8 of their proxy). For a company that $13.3m in sales last year, $1.3m in salary seems way, way too high. It’s even greater than the figure I flagged as excessive in fellow net-net Surge Components (SPRS).

Even with those concerns, though, I think UUU is way to cheap to ignore. I have a nice position in the stock and may continue to add on weakness. I only hope the company follows my lead and continues to buy back shares!!!

Disclosure- Long UUU, SPRS


Rating: 3.0/5 (4 votes)

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