On Jan 30, Whopper Investments introduced a very simple business to his readers. I must say, I was intrigued.
I researched it a bit more, starting always with the balance sheet.
The book value is 18.67M, with no debt. There is a line of credit, which has not been tapped and appears to be used by the company for liquidity crunches that may arise in their business. This tells me that management is careful and not cavalier.
Micropac has 10.06M in cash (55% of book), and the NCAV is approximately 17M.
My conservative liquidation value estimate is 14.73M.
With the current market cap of 13.54M, Micropac (MPAD) is selling under liquidation value! This should excite any Graham style value investor.
I must say that it did peak my interest too.
However, I wouldn't be true to Graham and Dodd, if I didn't look for margin of safety.
Let us dig deeper. Company supplies components for OEM parts for the US military and NASA. US DOD and NASA are 76% of revenue. With US government [eventually] deleveraging there is a significant risk of loss of revenue. In fact, there has been a gradual decline in revenue over last 6 quarters. With stable costs, the income is being squeezed. This could be due to competition or weakness in the defense sector-- it is hard to tell. In either case, this isn't good news.
I tried to see what gives Micropac the competitive advantage, and I couldn't find anything significant. Micropac own no patents, or exclusive licenses or franchises.
Micropac is making money and has enough for a rainy day (not even using the line of credit), but they might be in for a slow bleed as revenue declines.
Another thing that bothers me about this company is the 75% ownership by the 82 year old Heinz-Werner Hempel. This tells me that there is no quick catalyst on the horizon.
At current market price, I believe there isn't enough margin of safety to justify purchase of this, otherwise, fine company.
I love the simplicity of this organization and have placed it on my watch list. I will closely look at it again if Mr. Market gets even more negative and starts selling it close to absurd levels, such as 50% of NCAV.
Full Disclosure: No position.
