In a Solid State
Posted on September 21, 2009 by Richard Beddard
Filed Under Companies |
In practice:
Running fast into a headwind
Perhaps it’s the remarkably chipper state of the market that’s forcing me to look for bargains amongst the smallest of companies.
Solid State’s market value is £3m and it employs just 14 people manufacturing rugged and industrial computers and batteries and 25 people selling them and other manufacturers’ electronic components.
Most of the distribution is done by the original company, Solid State Supplies, while the manufacturing happens in three sub divisions of Steatite, a company Solid State (SSP) acquired in 2002 and combined with Wordsworth Technology in 2005.
Last week I was temporarily put off Total Systems, an even smaller company, by the size of its spread, so let’s get that bit of nasty news out of the way.
Solid State has a wide spread too, though not nearly as wide. The bid is 45p and the offer price is 52p implying an immediate loss of up to 13%, since an investor will pay a price closer to the higher offer price, but can only sell nearer the lower bid price.
To make this deal worthwhile, the shares need to be cheap at 52p then, not at the mid-price quoted on financial websites.
They are, potentially, as, even at 52p, Solid State’s ten-year price earnings ratio is about ten, my arbitrary upper limit for a bargain share.
That’s cheap for a company that has been profitable for nine out of the last ten years, all ten if you ignore one-off charges, and that went into the recession on a sound footing, reporting increasing profitability and no-long-term debt in its annual report in August.
Its F_Score, a measure of financial strength, is eight out of nine.
Flicking through their last four annual reports, I feel modest admiration for Solid State’s management.
As manufacturers relocated abroad, and demand for the components Solid State Supplies distributed began falling, they diversified into manufacturing themselves by acquiring Steatite, Wordsworth and most recently RZ Pressure, a Swiss battery pack manufacturer.
As consolidation among component manufacturers reduced the number of franchises Solid State Supplies operated in 2006, it acquired more.
For all of its hard work, Solid State’s been rewarded by a record of modest, and inconsistent growth. It seems like it has to run hard, finding new franchises and manufacturing businesses, just to creep forward into a headwind now stiffened by recession.
Headwinds are not particularly good news for investors, but they mean expectations are low, and Solid State may be undervalued.
But the shares are illiquid (only 27% are in public hands) and therefore expensive and sometimes difficult to get hold of, or get rid of.
They sank very briefly below 20p during the stockmarket panic in March. In retrospect they were an utter bargain then. But if there is another panic then holding small illiquid shares like this could be a very uncomfortable experience.
Nevertheless, I think Solid State might surprise us, and since its Normal Market Size is £970, it ought to be possible to buy £1,000 worth.
A broker I queried this morning could deal at 50.5p, so I’m going to include Solid State in the Thrifty 30 model portfolio at that price.
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Total Systems (TTS) is buying back shares. On the one hand, it should be applauded as the shares are very cheap. On the other hand the buy-back makes me nervous as management already has control and it brings them closer to being able to squeeze out minority investors (should they want to). Before Lorna Moran took Northern Recruitment private, the company was buying back shares – not that I am scarred by that experience or anything 
In theory:
‘Aint (much) sunshine
Mohnish Pabrai, a once feted hedge fund manager and value investor who lost heavily in the financial crisis, has learned to diversify according to Miguel Barbosa’s meeting notes.
Get out of risky investments, and get a second job says Nassim Taleb. Capitalism is as unhealthy as it was in 2007.
Japan has been suffered two decades of stagnation, says Andy Xie, and the economy could still get worse. Meanwhile here in the West, we’re making exactly the same mistakes.
A solitary contrarian voice, Ken Fisher’s, still says the US is ‘under indebted’ though.
Banks are not investable, says Saj Karsan. We don’t know how highly leveraged they are, all we know is it’s too high.
The construction industry could be heading back to the dark days of the 1990’s, says the FT. Then contractors agreed contracts on low margins and were stymied when the economy started to recover and costs rose.
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2 Responses to “In a Solid State”
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Do you have an RSS feed for this blog.
My own thoughts are surely companies as small as the ones you mention should be reliant on bank or private financing. The spreads on microcaps make them very unappealing as you say.
Hi Cityunslicker,
First of all, yes there is a feed: http://blog.iii.co.uk/feed/ - I should put a link on the front page.
Thanks for your comment. My fear is that’s what managements will decide - that the companies are better off private. Since such companies often have controlling shareholders it’s a big risk, which exacerbates low prices and wide spreads. So you may well be right. Let’s hope not in the case of Solid State, as I’ve added it to the portfolio now!