Description

Digirad sells nuclear diagnostic imaging equipment (gamma cameras) and provides imaging services and - after spending $1.5mm to restructure its business - is now generating strong cash and ebitda yet trades near its net cash level. I believe the unrecognized value of its $70mm revenues, $20mm+ GM, and $8mm EBITDA business makes it a double from here, even on fairly sober assumptions.  Additionally, in a sale or wind-down (for valuation purposes, we are not suggesting they do this though there is clearly too much excess cash), there is another $5-10mm in value from excess working capital and real value of equipment owned by DRAD.
They just reported strong earnings suggesting that their recent cost reductions and optimization plans have been working.

Numbers:
Stock price: $1.90/share
Net Cash: $1.66/share
Debt: $0
Shares o/s: 19.4mm
Mkt Cap: $37mm
Enterprise Val: ($5mm)

Run-rate EBITDA: $8mm/year based on recent quarter (which witnessed impact of all of DRAD's recent cost cutting initiatives.  That said, I use annualized EBITDA of $6mm, which may simply be too low but the higher # is not needed to recognize the value here. 
LTM Capex: $1.7mm
LTM Op CF: $6.0mm

Excess detail doesn't help the analysis here - the CEO was removed and replaced by a young but $-focused CFO who frankly is doing the basic blocking and tackling which we and others suggested from day one, ie stop low ROI growth spending in the struggling services business and let the business generate the cash its high margins suggest it capable of.  The core eqpt sales business makes very real money and - though its not the best business in the world due to competition, its real, has scale via $70mm in revenues, and is not in danger of obsolescence from technology as nuclear imaging isn't going anywhere.  The cash is real and is all held in treasuries and money markets and the cost cuts have dropped capex from $5mm+/yr to a run-rate of ~ $1mm/year.  With $80mm+ in NOLs, this is now a cash cow business, as witnessed by its $6mm in LTM operating cash flow.  Though these are all small numbers, on a $37mm mkt cap and $5mm enterprise value company, they are significant. 

Our sole criticism is that DRAD keeps adding Board members who are hcare guys instead of large/ or vested shareholders or finance-focused investors. Because of DRAD's excess cash and because acquisitions in this space are a risk and there are few synergistic opportunities, more vested and finance-focused directors would add more value than added industry guys, especially since few of the directors have experience directly related to this segment of healthcare.  That said, if the Board does not make shareholder friendly decisions, we'd not be surprised if large shareholders (we are small and under 5%) speak up and ask for cash back via a dividend or return of capital.

At just 5x free cash flow, DRAD's business is worth $1.20-1.40/share, making DRAD worth $3+/share very reasonably. Again, this is based just on net cash and a likely too-low 5x free cash value on a reasonable and potentially conservative EBITDA number.  Further, if acquired, a strategic player would pay more for the $3.50/share in revenues as well as the excess working capital and equipment (w/c a nd eqpt alone can add another $0.50+/share easily (eqpuipment is on an accelerated depreciation schedule in the first place, but on top of this if we say its worth 65c on the dollar in a liquidation thats another 35c, AR and Inv are $6.5mm above non-deferred rev liabilities, representing another 35c/share). 

Most likely we see ongoing EBITDA and cash positive quarters increasing the balance sheet and - hopefully - the Board issuing a nice return of capital and creating a dividend instead of wsating assets on a large acquisition plan (we are seeing many microcaps try this so that Board members can justify paying their director fees in a tough economy).  If the latter occurs, we again believe there will be a short leash, especially as insiders own very little stock here.  All-in, we simply like the value - the CEO change and decision to cut the growth spend reflects a meaningful catalyst, there is too much cash to screw it up if buying anywhere near current levels, and there are substantial and very real added assets.  NOLs are meaningful and a sizable and now profitable business comes essentially for free, and we believe its clear worth - at a minimum - offers investors sizable appreciation. 

Catalyst

CEO replaced by hungry CFO, decision to stop growth spend on services business has led to EBITDA and cash flow growth, just reported strong quarter as first piece of evidence that new plan is working.