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Aviat Networks: An Interesting Opportunity

June 09, 2014 | About:
Paul Andrews

Whopper Investments

49 followers

One stock I’ve been tossing around lately is Aviat Networks (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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