Description

A stock that can be played multiple ways for value realization, Quipp designs, manufactures, installs, and services post-press material handling equipment for newspapers. Equipment goes by names like Bottomwrapper, Newspaper Stacker, Automatic Cart Loading System, Newspaper Gripper and Conveyorm, Automatic Palletizer, etc. They service and sell spare parts for the equipment after market as well. A neat little cyclical but growing business, with 10%/year revenue growth over the last ten years, during which they have increased earnings from 100K to $5 million. Has generated gobs of cash which does come back to shareholders.

The stock is at 19.85, and the company has announced a Dutch auction self-tender for a little over 1/3 the float, or over 1/4 total shares outstanding, at 20-23, to commence any day now. It was announced two weeks ago. So there is an arbitrage opportunity, though it is very possible that the offer will be oversubscribed, resulting in pro-rata cash out.

That's not the only special aspect of this situation, though. The Dutch auction came about after a buyout fell through on financing and the deteriorating economy. During the time the legal documents were drawn up the stock was trading in the mid-high 20's. It is likely the buyout offer would have been for $30 or higher. There has been a string of MBOs and LBOs that have fallen apart on financing since last fall, and it is becoming a common story (and a ripe field for finding value, IMO). It doesn't change that there was a private financial buyer willing to pay a significant premium to the current price. A strategic buyer would pay more, though one doesn't seem readily available.

The valuation is fairly compelling. With 1.9 million shares out, the market cap sits around $38 million. There is about $17 million in cash and securities, the result of slowing capital expense, and no significant debt. 2000 EBITDA ex-cap ex and ex-interest income was $6.5 million.

Free cash generation has been great relative to market cap. Total cap ex the last three years was only about $1 million, and Total operating cash flows the last three years were $14.4 million. With EV at just over $20 million, that's pretty cheap. Two years ago, the company paid a $7/share special dividend because of the cash build up. Book value rebounded to near pre-dividend levels in just two years, and the share price recovered within 1 1/2 years. Margins are good, and ROA, ROE and ROIC have all been trending strongly higher with increased scale economies, offset by economic slowing.

So you have a stock in a company that generates lots of cash and does not reinvest it in the business to any great length (R&D at 2% of sales, cap ex at just a few hundred thousand - nearly all maintenance). So every few years a sizable cash and investment portfolio accumulates. Two years ago it paid the $7/sh special dividend, and this year it is buying back 1/3 the shares in a Dutch auction. Over the years the stock has been steadily appreciating. In recent years, cash flow has really jumped, and it has not been reflected in the share price.

The fall-off in operating performance at newspapers has had an effect. No single newspaper accounted for more than 10% of sales, though Gannet and Knight Ridder were 18% and 12% of sales last year. That concentration is down from 1998, when Gannett was 32% of sales. Also, foreign sales are at 13%. At year end, backlog was $1.5 million higher than last year, but the incoming orders have slowed as much as 50% in the first quarter. International avenues for growth are being pursued, but its two biggest competitors worldwide are Swiss and German in origin. Given the company's small size and low-tech, brandable product line, growth should nevertheless be good through cycles and in excess of the industry trends.

The stock sold off after the buyout fell through - the stock is fundamentally illiquid and those hoping for a quick buyout were natural sellers when it fell through. This is a readily overlooked stock, and buyers didn't materialize to catch the shares. The Dutch auction is meant to shake out remaining weak holders without wreaking havoc on the share price. Management have not been buyers recently (not a surprise since legally they couldn't be), and they own about 21%. The buyer was a financial one - strategically, it is not clear that there is a shoe-in for a potential buyer, but the industry for newspaper equipment is relatively stagnant to shrinking, which is spurring consolidation. There is some evidence that there is a brand here with a good reputation.

There is some logic in not tendering shares here and just awaiting or instigating for value realization. After the tender, assuming it goes off at about 21 or so, you'll still have a stock bought at $19.85 with $4/sh cash and history of value creation for shareholders as well as strong free cash flow averaging $3.30/share the last three years. So market cap/ avg FCF (over last three years) is around 6. Back out the cash and it falls to less than 5. Don't need growth or even less-than dramatic long-term revenue shrinkage to make that attractive. EV/EBITDA (ex-cap ex, ex interest income) is 15.85/4.81= 3.3X on last year's strong (but not all-time peak) numbers. It is not terribly hard to buy shares, as the largest shareholder has been steady liquidator and to my knowledge a disintrested wholesaler has a large block ready to go at 19.80-19.85.

Catalyst

Low tech, cash-generating business offers several catalysts 1) Arbitrage with Dutch auction 2) Ultimate sale of company at a nice premium from current price once economy turns/debt markets recover 3) Await realization of value in market. 4) Not really a catlyst, but ultimately, if one wants a control situation, management are not majority owners here, and the cash flow could substantially eclipse purchase price over next 5+ years. Two largest shareholders are non-management, which provides some undefinable but real catalyst as well. To the extent one wants out, as seems to be the case, it also creates additional pressure on an illiquid stock that will not last forever.