Dataram Corporation (NASDAQ: DRAM) is a classic net-net stock, with a $10.6M market cap at yesterday’s closing price of $1.20 and around $18.5M of value in liquidation, including $16M in cash.
About DRAM
According to the company’s website, DRAM is a developer, manufacturer and marketer of large-capacity memory products primarily used in high-performance network servers and workstations. The stock is down sharply because the company cut its dividend and its operating cash flow has turned negative in its most recent quarter, burning through $1.3M. We don’t know anything about “large-capacity memory products” so we don’t know if this is a short term blip on the road to more profits or the beginning of the end.
The value proposition
According to DRAM’s most recent quarterly report, the balance sheet looks reasonably healthy. Set out below is our summary analysis (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):
We estimate that DRAM has a liquidating value of around $18.5M, or $2.08 per share. In coming to that number, we’ve written down the Receivables by 20%, Inventory by 33% and Other Long Term Assets by 50%.
With its stock price at $1.20, DRAM is trading at 58% of its value in a liquidation and at a 24% discount to its net cash (cash less all liabilities) of $1.58 per share.
Catalysts
The risk with DRAM, as it is with any net net or net cash stock, is that the company might not make a profit any time soon and won’t liquidate before it dissipates its remaining cash. As we said above, we’ve got no insight into DRAM’s business and don’t know whether it can trade out of its present difficulties and back to at least a positive operating cash flow. According to the 10Q, the company is authorized to repurchase 172,196 shares under a stock repurchase plan but this is an immaterial amount in the context of the 8.9M shares on issue and the plan has been in existence since 2002. The best hope for the stockholders is that the company re-institutes its dividend, which, given its $16M in cash, it certainly seems able to do. No noted activists have disclosed a holding in the company, which means management have no incentive to do anything so stockholder friendly.
Conclusion
DRAM, at 58% of its liquidating value and 76% of its cash backing, is very cheap. We believe that it is worth watching but, with no obvious catalysts and a high cash burn rate, probably one to avoid unless you are willing to bet that its remaining cash might attract an activist or the business will turn around before it runs out of money.
[Disclosure: We do have a holding in DRAM. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]
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