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Aetrium ($ATRM) is a net-net with a catalyst and plenty of upside, so what's not to like?

August 20, 2012 | About:

As the title of this post says, Aetrium (ATRM) is a net-net with a catalyst and plenty of upside. Given all of that, the question I kept asking myself “is there any reason not to invest in this company?”

And I think the answer would be a sound “no” if you were running a big, diversified basket of 50 or so net-nets with a 2% allocation to each.

But I think the answer is a resounding “no” if you (like me) tend to run a more concentrated portfolio. Put simply, Aetrium is just too risky to have a big piece of your portfolio in (at least IMO; I’d rather something like ADDvantage (NASDAQ:AEY)).

Let’s start with some background.

Aetrium designs and manufacturers products for the handling and testing of integrated circuits, the highest revenue component of the semiconductor industry. And business was booming before the financial crisis- in 2007, revenue came in at ~$28m with operating income over $4m and EPS over $0.60 per share (they had basically the same amount of shares out then as they do now).

To put those figures in perspective, this is a business currently trading for under $6m EV and under $0.90 per share. In other words, on both profitability metrics Aetrium trades for barely above what they earned in one year in 2007.

Of course, things have fallen off a cliff since then. Each year has gotten progressively worse, culminating in their most recent fiscal year (2011), when they did barely $9m of revenue and lost $4.8m in EBIT. And things are looking even worse this year. Revenue for the first six months of the year are down to $3.9m (vs. $5.1m for this first six months last year), with similar operating loss numbers due to some big cuts in R&D.

So that’s where the big upside would come in- if they could do revenues and earnings that even approximated what they were doing in 2007, this stock is easily up 5-10x.

And while earnings look terrible, the balance sheet is actually very strong- book value per share comes in at ~$1.07 per share, while NCAV comes in at almost $1.04 per share (the company has basically no liabilities or assets other than current assets). That’s a decent bit of upside from today’s share price of ~$0.93, though given the huge and persistent operating losses I’d prefer more of an asset cushion.

And until two weeks ago you could have had shares with much a bigger asset cushion. Shares had traded pretty consistently in the low $0.70 / high $0.60 range until an activist bought up almost 17% of shares and disclosed they had met with the CEO to discuss improving performance and pushing for asset sales.

Insider ownership is virtually non-existent here (insiders own ~9% of the company once options are factored in, and most insiders own under one year’s worth of salary), so the activist likely carries some serious weight given how many shares he owns and the potential for him to take significant board seats.

So, while the shares aren’t exactly a screaming bargain to me at today’s prices, and I’d likely only include them in a net net basket, I do think ATRM serves as a good example for the inefficiencies to be found in microcap land.

ATRM was trading way below liquidation value in the mid-$0.60s, and there are plenty of other micro-caps trading at similar discounts. A fund with a some patience and a decent amount of capital can do something similar here: acquire a large block of shares and lean on management to unlock value. The market clearly thinks that’s what is going to happen here and has responded by increasing ATRM’s price, and I’m sure a fund with enough capital could do something similar in a lot of other cases.

Disclosure- Long AEY

Rating: 4.2/5 (5 votes)


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