Solitron Devices Inc. (SODI, Financial) shares trade below Net Current Asset Value (NCAV), making it a Net-Net stock. The definition of a Net-Net is when market capitalization exceeds NCAV (Total Current Assets – Total Liabilities). The current price is $4.66/share and NCAV (($13,106,000- $1,594,000)/ 2,411,137 diluted shares outstanding) comes out to $4.77/share.
Company
Solitron Devices sells solid-state semiconductor components and related devices to the military and aerospace markets. The company’s products include a large variety of bipolar and metal oxide semiconductor (“MOS”) power transistors and other related products. Since most of the company’s products are sold to the U.S. government, the products are predominantly custom made.
An example of Solitron's product from the company website:
TTM Financial Trends and Ratios Per GuruFocus
Here is the revenue trend. You can see that revenue has improved in the last couple of years.
Net Income has been consistently positive.
PE Ratio of 13.90
Price to Book of 0.85
EV / EBIT of 3.07
Another positive from the 10Q: “At May 31, 2015, the Company has net operating loss carryforwards of approximately $11,701,000 that expire through February 2029.”
This means that the company will be able to pay a lower tax rate for years to come. The company also paid a dividend in 2015 of $0.25.
Why is the stock cheap?
The reason the stock is out of favor can be summed up in one word: management. Management is extremely shareholder unfriendly bordering on dismissive. It is currently in the middle of a proxy fight as activist investors have become involved with the company. Eriksen Capital owns ~6.7% of SODI shares. On July 2, it sent out this letter here.
I find the letter’s tone to be quite humorous and the allegations to be disturbing. It paints a very unflattering picture of a CEO who has filled the board with cronies and pillaged the company’s bank account. Here are some of my favorite quotes:
- “the long term record under CEO Shevach Saraf is horrible”
- “For nearly twenty years, from 1993 to 2013, CEO Shevach Saraf and the Board did not hold annual meetings even though Delaware corporate law requires it. From 1996 to 2013 the only directors were Mr. Saraf and two others appointed solely by him after his own term had already expired, and, based on a careful search of SEC filings, it seems clear none were presented to shareholders for affirmation.”
- “CEO Saraf was granted 10% of shares at his hiring for free. He was later granted options for another 18% of the company, plus 15% of profits in excess of $250,000 per year. If you add that up it is up to 43% of economic gains in addition to his significant $321,500 annual salary.”
- “By our calculation, CEO Saraf has received nearly half of Solitron’s economic gains during his twenty plus year tenure.”
Picture of Shevach Saraf:
Risks
The company's sales are reliant on a few customers, specifically the U.S. government. If there are budget cuts, then SODI may be affected. From the most recent 10Q, "Subsequent to the three months ended May 31, 2015, the Company has been advised by certain of its key customers that they are currently experiencing delays in receiving contract awards from the U.S. government".
Conclusion
SODI has a market capitalization of $10.7M, and the stock certainly looks cheap. If activist investors are able to force management to become more shareholder friendly by buying back shares or paying more dividends, then the stock should go higher. For those interested in trading this stock, people should use caution as it is very illiquid. Limit orders are highly recommended. Many of you are more well-read on Ben Graham. What would he say about this Net-Net? I'm interested to hear your feedback in the comments below.
