I exited my Solitron stake almost a year ago, mainly because of the poor corporate governance at the company coupled with my anticipation that nothing would happen anytime soon. Luckily it appears that things might change for the better sooner than expected. Eriksen Capital Management filed a preliminary proxy statement today in which, among other things, Tim Eriksen tries to get himself elected to the board and to declassifying the board structure.
While I don’t have a position in Solitron anymore I think these changes would be great for the company, and I would urge current Solitron shareholders to support these proposals when the time comes at the annual general meeting. In the meantime, this thread at the CoBF message board should provide plenty of background on why change is absolutely needed.
No position in Solitron
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
Most annual shareholder meetings aren’t very exiting, but the Solitron AGM that was held earlier this week wasn’t routine. It was the first shareholder meeting in literally decades, and the company needed some pushing to hold it in the first place. Unfortunately for me the meeting was held at the other side of the world so I was unable to attend, but multiple bloggers and other shareholders managed to find their way to Miami. Oddball Stocks has a great summary online of the meeting and his thoughts on the event.
From my point of view the meeting seems to have been a reasonable success. The original board of directors has been replaced, and while someone in the comments at Oddball Stocks mentioned that Dr. Davis seems to have been knowledgeable about the business and valuable to the company I don’t think that really matters. His first and foremost responsibility was representing the interests of shareholders.
Looking at the results of the AGM votes is also interesting and shows what the shareholder base is thinking. A potential problem with prodding management into action is that a large part of the shareholder base could be apathetic. Approximately 25% of the outstanding shares showed up as broker non-votes, so Solitron does have it’s share of these lazy shareholders. But with just 457,100 shares voting for Dr. Davis and 865,746 against it’s pretty clear that the company cannot ignore shareholders any longer. Presumably almost half of the for-votes were from the CEO, Shevach Saraf, who owns 218,155 shares. If we exclude him from the results almost 80% of shareholders voted against the incumbent directors.
Hopefully the AGM has been a wake-up call for the company and something positive will happen. If not, I can sleep well at night knowing that my fellow shareholders are willing to take action when needed.
Solitron announced a few months ago that it intends to hold a shareholder meeting, for the first time in years, this summer after the release of the annual results. The Furlong Fund isn’t going to wait for this, and is going to court to compel the company to hold a meeting as soon as possible. Good news, especially since the fund is pushing for some big (and in my opinion positive) changes with regards to the company’s board and poison pill:
On February 5, 2013, the Plaintiff submitted an amended Rule 14a-8 proposal and an Amended Stockholder Notice providing notice that Plaintiff intends to (1) nominate two directors; (2) implement a majority voting standard for uncontested direct elections; (3) present nonbinding resolution to redeem its poison pill; (4) amend the by-laws to require a shareholder vote before adopting or amending a rights plan; (5) repeal all by-laws enacted since January 14, 2013 which were not filed with the SEC and are inconsistent with any of the proposal approved by the shareholders at the next annual meeting; (6) amend the bylaws to grant shareholder access to the Company’s proxy ballot for future elections; (7) amend the bylaws, providing Solitron shareholders the option to fill newly created board seats between annual meetings by vote of the shareholders as opposed to appointment by the board and clarifying the right of shareholders at an annual meeting to elect directors to newly created board seats where those seats are up for election; (8) expand the size of the board from three (3) to six (6) board members; and (9) if the board is expanded to six (6) or the number of seats otherwise increased, to nominate an additional three (3) directors
Check out this post at “Ragnar Is A Pirate” for the full (legal) details.
Solitron filed it’s form 10-Q today for the second quarter of fiscal year 2013. It’s mostly business as usual: earnings are positive, but far from great. The one noteworthy event is the fact that Solitron bought some shares back this quarter in a privately negotiated transaction. Unfortunately it seems a one time event:
On August 28, 2012, the Company repurchased 99,943 shares of its common stock from a stockholder in a privately negotiated transaction at a price of $2.75 per share. The Company has not adopted a stock repurchase program or plan.
The transaction reduced the total of basic shares outstanding with 4 percent. Its not a lot, but good to see that at least a bit of the cash on the balance sheet is put to use.