|Shares Out. (in M):||18||P/E||-26x||-26x|
|Market Cap (in M):||74||P/FCF||-32x||-32x|
|Net Debt (in M):||86||EBIT||0||0|
I generally am not a fan of posting ideas that have been repeatedly written up, but I believe that given the current stock price, initial NOL expiry, acquisition related charge on last quarter's 10Q, and finished restructuring at PC Group, a deal is likely imminent for Clarus. Nevertheless, regardless of whether a deal is done in the next 6 months or two years, a high quality management team and discount to NAV make Clarus a great long in the current environment of overly valued equities and low interest rates.
Clarus is a trading at $4.22/share with $4.95/share in cash and NOLs worth $228mm (which I value at 10% or $1.30/share) for a total NAV of $6.25. The company is run by a high quality owner/manager, Warren Kanders (20% of common stock with over 1.1mm shares purchased in the market for between $4 and $6). The thesis here is very simple, Kanders has a history of successfully running quality businesses and if he can find a highly cash flow generating business and harness the NOLs, the stock should move to at least $6.25, value of PV of NOLs and net cash.
From 2002 proxy, Kanders' successes:
Armor: The price per share increased from $0.76 in January 1996, the date of our initial investment, to $26.80 on May 2, 2002.
Langer: The price per share increased from $1.52 in February 2001, the date of our initial investment, to $8.15 on May 2, 2002.
Benson: The price per share increased from $0.375 in January 1992, the date of our initial investment, to $10.25 in the summer of 1995 when I sold my interest.
Kanders sold Armor in 2007 for $88/share. Langer, on the other hand, wasn't nearly as successful as Armor or Benson. However, I would argue that given the massive restructuring in 2008 at Langer (now PC Group), Kanders now has more time to spend on Clarus. Without getting into all the details, PC Group massively restructured in 2008, selling its Langer UK business in January, Regal Medical Supply business in June, Bi-Op Laboratories business in July and Langer Orthotics business in October in order to strengthen its balance sheet, cut opex and re-focus on its Twincraft and Silipos businesses. The company is currently very small and management will now focus on growing core businesses rather than acquiring new businesses, which should allow Kanders more time to focus on Clarus. While one might argue that he's had all of 2009 to focus on acquisitions for Clarus, I'd say that through speaking with the company, those who know him and reading through many interviews with him and his colleagues, I've learned that he's a very patient investor and has been evaluating opportunities in 2009, but will only pull the trigger on an appropriate acquisition. Now that the restructuring at PC Group is complete, he has the time to focus on high quality investment opportunities for Clarus. While Kanders' spreading himself too thinly is a risk, I believe he is a smart capital allocator and if he can't find a proper acquisition, he would likely liquidate the stock for net cash. Alternatively, if he wasn't able to run the company post acquisition, he has had a history of finding high quality talent in the past and would likely appoint a CEO to run the business
Why has the stock dropped into the $4 range despite $4.95 in net cash?
As discussed in previous VIC writeups, it looked interesting in the $6-7 range, but over the last couple years certain investors, mainly Ashford Capital have been massively selling their stake in the company. Ashford owned close to 2mm shares in Q2 08 and steadily sold that down each quarter to a current 745k shares, a substantial supply given the 13.7mm share float. I can't speculate as to Ashford's impetus for selling, but many other smaller investors have also thrown in the towel given the delay in finding an acquisition. While I agree, it has taken awhile to potentially get a deal done, other than Kanders' potentially having more time to spend on Clarus, a couple more signs point to an imminent deal. Q3's 10-Q showed a $32k line item for acquisition related expenses. The company has never had such an expense in the past and it clearly points to legal / banking / auditing fees related to the diligence of a particular acquisition. Also, the first of the NOLs recently expired in Q4 09, thus it is in the company's best interests to acquire a target soon, rather than lose the tax shield. Nevertheless $200+ in NOLs does not expire until after 2020.
The main risk here is that Kanders squanders the cash by acquiring a low quality company and the market does not attribute cash + PV of NOLs to the company. Given Kanders' substantial ownership in the company and his history of being a smart operator, this risk seems to be mitigated.
Clarus is currently burning cash on salaries and office space. While the company projected FCF neutrality last year, given low interest rates, the company has been burning some cash. In a worst case scenario, assuming interest rates do not rise and it takes two years for Kanders to decide he cannot find an acquisition and liquidates the company, cash distributed would be $4.69 ($4.95 minus $.13/yr in cash burn), thus an 11% return over two years (absolute worst case in my opinion).
For the reasons above, I think a deal gets done very soon, but if not, given the stock is trading at below net cash, Kanders has been buying in this range and Ashford Capital is close to selling the majority of their stake (seems like they are disciplined and aren't selling below $4-it's not that their fund is liquidating, but rather that they are focusing on other opportunities), there's a strong margin of safety to owning the stock. Moreover, with low borrowing costs, the opportunity cost to own the company is low, given the 50% upside, even if a deal isn't announced this year.
Given a recent acquisition related charge in the 10-Q, recent expiry of NOLs and additional bandwidth for Kanders to evaluate an acquisition, a deal looks imminent.
|Subject||RE: RE: for what it's worth|
|Entry||01/11/2010 04:03 PM|
as i sit here in my spiderman underoos, i find it difficult to disagree with your statement. that said, i do think that he has demonstrated a significant lack of urgency to date...
|Entry||05/10/2010 05:23 PM|
Listened to the call...details pretty sparse on the financials for these two acquired businesses. $113mm revs in 2009. Nothing else disclosed. Anybody know anything further?
|Entry||05/11/2010 06:31 AM|
So I use COLM as a rough comp. COLM has a ton more scale than this business will have, so it has some operating leverage, but its also dealing with some of the behemoths of the retail industry so lose a little negotiating leverage. In its golden years it was doing 15% operating margins, now its doing 10%.
I assume 17.4mm shrs + 3.75mm issued for Gregory + 2.0mm (assumed) additional primary shares issued to the BD sellers = 23.2mm shrs
I assume they draw down $10mm on their credit line. In addition they have the $22.5mm seller note from Gregory so a total of $32.5mm. 6.5-7% rate implies about $2mm of interest expense.
I assume PF cash = $80.6mm (starting) + $12mm (new shrs issued to BD sellers) + $10mm (new credit line) - $90mm for BD = $12.6mm balance.
Assume revenues this year of $120mm.
@ 10% operating mgn = $12mm EBIT - $2mm int expense = $10mm pre-tax = $6mm net income (fully-taxed, I'll back the NOL value off the EV).
@ 15% operating mgn = $18mm EBIT - $2mm int expense = $16mm pre-tax = $9.6mm net income (fully-taxed)
$0.26/shr @ 10% operating margin
$0.40/shr @ 15% operating margin
Stock is at $6/shr. I assume PV(NOL) is about $1.50/shr, so net of that you're paying $4.50/shr for the business.
So, its trading somewhere between 11-17x. Doesn't seem terribly cheap to me. Cash flow will obviously be better than earning yield as they burn off the NOL, but since the NOL is finite doesn't seem appropriate to me to value on the basis of FCF.
Would appreciate any thoughts...