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Aviat Networks: An Interesting Opportunity

June 09, 2014 | About:

One stock I’ve been tossing around lately is Aviat Networks (NASDAQ:AVNW). As so many interesting stocks have recently, it was written up on seeking alpha here if you’re looking for another perspective.

The initial reason for my attraction is pretty simple: $82m (a bit over $1.32 per share) in net current assets (current assets less all liabilities) versus a market cap of $73m (or just under $1.19 per share). Stocks trading for less than net current assets are pretty rare in today’s market.

I don’t have anything extremely insightful to add on the business itself. It seems a very competitive one and I doubt the economics are likely to be attractive long term. However, Ithat’s generally the case with stocks trading for less than current assets, and I do think there’s an opportunity here. The company should do at least $325m in revenue this year with roughly 25% gross margins, so gross profit will come in around at around $82m. I’d have to think there are several strategics who are looking at that $82m gross profit number and wondering how much of their $35-40m in annual R&D and $90m-ish in SG&A could be taken out as synergies in a potential merger. I would guess the answer is “quite a good bit”, and I wouldn’t be surprised if a potential buyer could end up buying at least $10-15m in annual operating profit after taking all of their synergies out. Factor in all of AVNT’s cash, and a potential buyer could pay a pretty decent premium and buy AVNT for a very reasonable multiple, and that’s without factoring in any rebound revenue from their end markets.

My biggest issue here, aside from the industry, is incentives. The company obviously has a lot of cash ($47.5m, or around 2/3 of market cap), and I think you’re biggest worry as an investor is that their incentive is more towards buying a company that looks just like them on a similar synergy type thesis versus selling to an acquirer. The reasons I think the incentives are towards that are simple: all executives and directors own, in total, around $5m worth of shares. Insiders, in total, made about $5m in salary and benefits from the company last year (roughly the total of compensation for the top five listed executives plus the directors). If I had to guess, I would say incentives are aligned for executives to stay independent and/or make an acquisition and grow larger. Note that I’m not necessarily saying that’s a bad thing, just that this is an industry I don’t particularly like or understand and I certainly wouldn’t be thrilled to invest in the company if that was the end.

It seems to be a situation ripe for an activist, which is why I’m surprised none have popped up so far. Privet fund filed a 13-D owning 5%+ of the stock last year, but they have since sold down to under 5%.

Overall, it’s an interesting opportunity, and I certainly considered adding it to a net net basket with DSWL and a few others I own (there aren’t exactly a ton out there right now!). But the lack of activist and industry have kept me on the sidelines for now.

Disclosure: Long DSWL. Currently only monitoring AVNW.

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