Description

Despite the VIC bargain meter being at an all time high and with so many cheap stocks available to choose from, White Electronics (WEDC) differentiates itself from those cheap stocks because it has a definable catalyst with a true exit strategy for investors in the near term.  Until recently, WEDC had two business segments – a profitable and growing defense business and a money losing commercial electronics display business.  On October 1, 2008, the company announced that it would operate exclusively as a defense electronics manufacturer and supplier and that it would dispose of the display business.  Also, the company announced the hiring of Jefferies Quarterdeck to explore strategic alternatives.

In addition, the CEO either resigned or was forced out in August 2008.  Since he was the one who acquired the low margin, money losing display business in an effort to show revenue growth, my guess is that he was forced out as the board grew tired of his antics.  On September 25, Wynnefield Parnters sent a letter to the board that said:

“The Company at a minimum should publicly disclose: (i) the names of the directors comprising the strategic review committee; (ii) the mandate and the responsibilities of the committee; (iii) the identity of any financial advisors assisting the committee; and (iv) that the committee is directed to complete its analysis and publicly present its recommendations to the Company’s Board and shareholders by December 1, 2008.   Also, Wynnefield in a separate letter to the Board, requested the appointment of Brian Kahn and that he assist in the strategic alternative process.  Mr. Kahn is a former defense industry analyst from Fidelity and has extensive defense industry contacts in addition to being a large shareholder.

Before you hit the “3” rating and say that strategic alternatives and activist investing are a thing of the past, consider this – the total enterprise value is $25 million, the company has $50 million in cash, no debt, and the defense business has done approximately $38 million in revenues and $7.5 million in EBITDA for the first 9 months of this fiscal year ending June 30, 2008.  If we assume steady state for the last quarter of the fiscal year, then the company will do $51 million in revenues and $10 million in EBITDA for the full year.  That means that a defense business that has many important sole source contracts is trading at 2.5x TTM EBITDA.  I know that the world is different today than it was a year ago, but these small unique defense businesses are still worth significantly more than 2.5x TTM EBITDA in my opinion.  And remarkably, unlike Yahoo and so many others, on October 1 the company more or less publicly responded to Wynnefield’s demands.  Logically, we should conclude that since the company has yet to hire a new CEO and that since they hired one of the best defense bankers, the company will be sold in short order.  The only question at this point is what price will it be sold for. 

The following chart shows the company’s military electronics segment performance:

                              3 mos                   3 mos                                  9 mos                   9 mos

                              6/30/08               6/30/07                           6/30/08                 6/30/07

Rev                        13.7                      12.6                                     37.9                      32.8

EBIT                       2.4                         2.4                                        5.8                         5.0

Depr                      .6                           .5                                          1.7                         1.6

Here are some excerpts from the June 2008 10Q:

Military sales increased $1.0 million for the three months ended June 28, 2008 when compared to the three months ended June 30, 2007. Military sales increased $4.9 million for the nine months ended June 28, 2008 when compared to the nine months ended June 30, 2007. The increases in military sales were due to the shipment of orders received over recent quarters, primarily in the microelectronic segment. The military market in the microelectronic segment is expected to continue its growth for the balance of fiscal year 2008.

We received new orders during the quarter of $10.1 million for the microelectronic segment. We continue to experience consistent bookings from our military customers and expect this trend to continue for the remainder of the fiscal year. Backlog as of June 28, 2008 for the microelectronic segment was $31.6 million.

The microelectronic segment gross margins were 44% and 42%, respectively, for the three and nine months ended June 28, 2008, versus 43% and 43%, respectively, during the comparable periods of fiscal 2007. The increase for the three month period was primarily due to a slightly higher margin product mix. The decrease for the nine month period was primarily due to lower yields on new products introduced and a slightly lower margin product mix.

Within the microelectronic segment, Arrow Electronics and L-3 Communications accounted for $5.7 million and $4.3 million, or 15% and 11%, respectively, of net sales.

Lastly, the chairman and founder / namesake of the company, Ed White is approaching 80 years old and owns a significant amount of stock.  And with the change in capital gains likely coming, my sense is that Ed is ready to sell his baby.

Catalyst