I have owned Solitron Devices for more than two years. When I bought it I saw a profitable company trading at the value of the cash on the balance sheet while I was blissfully unaware about the corporate governance issues facing the company. Since that time some progress has been made on the corporate governance front. The company held it first shareholder meeting in decades last year, and the next meeting will be held in July. Solitron also paid its first ever dividend last month, although it was a very small one. The $0.05/share represent a yield of 1.2% and cost the company a bit more than $100 thousand while they have almost $7 million in cash and equivalents on the balance sheet.
Unfortunately I don’t think there will be a lot more progress anytime soon. In the past few years a couple of activist hedge funds bought a stake in the company and pressed for changes, but last week Groveland Capital exited their stake. Their stake was bought by a small hedge fund located in the Netherlands that is run by a 26-year old manager. I doubt that he can achieve more than Groveland Capital. He doesn’t have the experience, and his location will also be a handicap.
In the mean time I don’t think Solitron is trading at a big discount to it’s potential intrinsic value anymore. When we look at the historical earnings we see the following picture:
Last years operating income of $718 thousand is close to the average of the past years and in my opinion a good number to use in a base case valuation. Since the company doesn’t pay taxes because of significant NOLs carryforwards we can simply throw a multiple on operating income to estimate the value of the operating business. A 10x multiple seems pretty fair to me. Add the cash balance to this number and account for the dilutive effect of the outstanding options and I get a fair value per share of $5.48. Use a 8.5x multiple and fair value is $5.07 per share.
This represent an upside potential between 22% and 32%, but this is not what the stock should be worth today. That is what the stock could be worth if the management team (read: Shevach Saraf) would suddenly deploy capital in a more sensible manner instead of just letting it sit idle on the balance sheet. At the moment the stock deserves to trade at a discount to its potential value even if at some point in the future the strategy is changed because the return on the cash will be near zero in the mean time. You could argue that that is a fair risk adjusted return, but you also need to consider your opportunity cost.
Because of that I think that Solitron is currently more or less valued at the right price, and while this has been and probably will be an interesting stock to own just to see how the story will unfold I don’t think that is a good reason to own the stock. So I sold my position yesterday for a 36.2% gain versus my entry price: a reasonable result.
No position in Solitron anymore