Hi, guys --
A housing recovery play at less than 3/4 net current assets and within 10% of its 52 week low? Who could say no!?
(NB, nano-cap, may not be suitable for all accounts.)
Universal Security Instruments distributes and, through it's 50% joint-venture interest in Hong-Kong headquartered but PRC-based Eyston Company Limited, manufactures smoke and carbon monoxide alarms. They are a niche player in a duopoly dominated by the Kidde and BRK/First Alert brands. They sell to contractors and builders. The appeal of their product is, hey, why not save a buck on a fire alarm? Which sounds more reasonable to someone who's planning on installing 1,000 alarms for someone else than to someone who doesn't want their kids to die a gruesome death. So, no, this is not a consumer brand; they sell to the trade, and rely on newly placed alarms, not replacements.
Here's a quick valuation summary, in 1,000s:
Price
|
$4.25
|
Shares Outstanding
|
2,312
|
Market Cap
|
$9,826
|
NCA
|
$9,901
|
50% Of JV NCA
|
$3,996
|
Total NCA
|
$13,897
|
SH Equity
|
$25,589
|
NCA/Share
|
$6.01
|
Book/Share
|
$11.07
|
Price/NCA
|
0.72
|
Price/Book
|
0.38
|
Price/Peak EBT
|
1.32
|
This is cheap, real cheap, cigar-butt cheap, but as we'll see it might not be a cigar-butt at all.
The historical financials are complicated because of a disastrous acquisition (bad), a few years of selling direct to the consumer by filling shelf space for Home Depot (good), patent litigation (bad), and some kind of founders tiff about who actually owned the company anyway. Here's a somewhat cleansed version:
|
2013, annualized |
2012 |
2011 |
2010 |
2009 |
2008 |
2007 |
2006 |
2005 |
Revenues |
$13,032 |
$13,304 |
$13,249 |
$26,439 |
$26,097 |
$33,871 |
$32,934 |
$28,894 |
$23,465 |
Revs Ex. HD |
$13,032 |
$13,304 |
$13,249 |
$12,876 |
$13,936 |
$21,339 |
$29,282 |
$28,894 |
$23,465 |
COGS |
$8,730 |
$9,793 |
$9,488 |
$21,108 |
$19,998 |
$26,001 |
$22,505 |
$18,218 |
$16,146 |
Gross Profit |
$4,302 |
$3,511 |
$3,761 |
$5,331 |
$6,099 |
$7,870 |
$10,429 |
$10,676 |
$7,319 |
Gross Margin |
33.01% |
26.39% |
28.39% |
20.16% |
23.37% |
23.24% |
31.67% |
36.95% |
31.19% |
|
|
|
|
|
|
|
|
|
|
R&D |
$498 |
$570 |
$615 |
$712 |
$435 |
$364 |
$296 |
$296 |
$277 |
SGA&A |
$5,204 |
$4,389 |
$4,375 |
$4,731 |
$5,279 |
$6,124 |
$6,546 |
$7,290 |
$6,191 |
SG&A % of sales |
39.93% |
32.99% |
33.02% |
17.89% |
20.23% |
18.08% |
19.88% |
25.23% |
26.38% |
Op Inc |
-$1,400 |
-$1,448 |
-$1,229 |
-$112 |
$385 |
$1,382 |
$3,587 |
$3,090 |
$851 |
Margin |
-10.74% |
-10.88% |
-9.28% |
-0.42% |
1.48% |
4.08% |
10.89% |
10.69% |
3.63% |
|
|
|
|
|
|
|
|
|
|
JV |
-$252 |
$500 |
$1,691 |
$2,644 |
$1,529 |
$1,985 |
$3,845 |
$3,845 |
$2,370 |
Pre-tax |
-$1,652 |
-$948 |
$462 |
$2,532 |
$1,914 |
$3,367 |
$7,432 |
$6,935 |
$3,221 |
|
|
|
|
|
|
|
|
|
|
Housing Completions |
|
585 |
651 |
794 |
1197 |
1502 |
1979 |
1931 |
1841 |
Revs/Completion |
|
$22.74 |
$20.35 |
$16.22 |
$11.64 |
$14.21 |
$14.80 |
$14.96 |
$12.75 |
Stop and look at this thing.
Now that you've looked, I'll point out some a few interesting items:
-- Revenues ex-Home Depot collapsed between 2007 and 2009, like you'd expect from a product dependent on housing completions (smoke alarm's got to be the last thing put in, eh? So we're looking at completions, not starts.)
-- HD revenues were (much) lower margin, depressing GM between 2007-2011.
-- The US distribution business has been unprofitable since 2010; these losses have been masked for a while by equity interest in the Chinese JV, which has lately also started to lose money.
-- The all-important-but-perhaps-meaningless "Revs/completion" row shows, well, I don't want to read that much into it, but there's no evidence that UUU is losing share.
OK? So if you believe in a housing recovery, you'd think that their revenues would .... what? double? triple? And then apply 2006 margins and toss in some kind of positive contribution from the JV? Could be nice.
Other possible upsides are:
-- They've finally (after overpromising and underdelivering for years) started selling their Iophic alarms, which are supposed to:
A: Be single source protection against the two different kinds of fires -- fast (e.g., cooking oil on the stove) and smoldering (e.g., cigarette butt in the couch);
B: Drastically reduce nuisance alarams, which drive many to unplug the alarm altogether.
If this product gets some traction, that'd be great.
-- Jove's thunderbolt could strike twice; UUU could regain national consumer distribution through HD or Lowe's or whoever.
-- They could sell out to a competitor. Given their size, I don't think there'd be any anti-trust issues.
-- They're buying back stock; very small amounts, as is to be expected given the liquidity.
-- Not an easy business to break in to, and the top level description hides their exposure to construction, so the
stock could receive an unwarranted multiple.
Risks:
1: Housing recovery might not happen.
2: If it does, they might not participate.
3: Litigation:
-- A history of patent litigation. If another suit happens, that would
be expensive; if they lost, that could be real bad.
-- Product liability -- smoke alarms, "You killed my baby!", 'nuff said.
4: General nano-cap risks, including vastly larger competitors deciding
they need to be squished like a bug, and "who does management work
for anyway?"
5: The JV, from which they source all their product, might, due to changes
in the economics of Chinese manufacturing, become permanently unprofitable.
As is the case with a lot of small companies, the SEC filings are (thank God!) short
and easily digestible. It doesn't take that long to go through a decade of 10k's, and
I recommend the exercise to those who are interested.
Full Disclosure:
I think this is insanely cheap, but not all-in, can't-lose-money-on-this, insanely cheap. I've sized this so I won't be a forced seller if things work out like I hope; if it's a zero, it'll hurt but I'll be OK.
Fuller Disclosure:
I've owned/followed this since 2002; I'm at the "forgotten more than I know" stage, at this point it's like you hear an old flame is back in town and you don't even call, you just head straight for the Plaza, where she always stays, to see if she's there and in the mood.
Overflowing Disclosure:
I used to think YouTube was a complete waste of time, until I discovered this astonishing outtake from the 1974 classic, "Son Of Dracula":
http://www.youtube.com/watch?v=QHn5Vjb1040
Free lunch at Pete Luger's for the first to name all the performers
without, umm, reading the comments ....
I take that back. Anyone up for lunch at Peter Luger's?
Yours,
Bowd
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.
Housing turn-around.