Digirad Corporation (NASDAQ:DRAD) has filed its 10Q for the quarter ended June 30, 2009.
We started following DRAD (see our post archive here) because it was an undervalued asset play with a plan to sell assets and buy back its stock. The stock is up more than 118% since we started following it to close yesterday at $1.92, giving the company a market capitalization of $36.1M. We last estimated the liquidation value to be around $29.5M or $1.56 per share. We’ve now increased our valuation to $32.5M or $1.73 per share following a very good quarter for DRAD, in which it generated over $2.2M in cash. DRAD has also now started to buy back stock under its previously announced $2M stock repurchase plan.
The value proposition updated
DRAD had a very good second quarter, generating $3M in operating cash flow and ending the quarter up more than $2.2M in cash. Our updated estimate for the company’s liquidation value is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):
Off-balance sheet arrangements and contractual obligations: The company hasn’t disclosed any off-balance sheet arrangements in its most recent 10Q. The contractual obligations as at December 31 were around $3.0M, around $1.4M of which falls due in the next 12 months to December 31, 2009.
The catalyst
DRAD’s board has announced a stock buyback program:
The Company also announced that its board of directors has authorized a stock buyback program to repurchase up to an aggregate of $2 million of its issued and outstanding common shares. Digirad had approximately 19 million shares outstanding as of December 31, 2008. At current valuations, this repurchase plan would authorize the buyback of approximately 2.1 million shares, or approximately 11 percent of the company’s outstanding shares.
Chairman of the Digirad Board of Directors R. King Nelson said, “The board believes the Company’s direction and goals towards generating positive cash flow and earnings coupled with an undervalued stock price present a unique investment opportunity. We are confident this will provide a solid return to our shareholders.”
According to the most recent 10Q, the company has now started to buy its own stock, albeit a relatively small amount:
On February 4, 2009, our board of directors authorized a stock buyback program to repurchase up to an aggregate of $2.0 million of our issued and outstanding common shares. The timing of stock repurchases and the number of shares of common stock to be repurchased are in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The timing and extent of the repurchase depends upon market conditions, applicable legal requirements, and other factors. During the three and six months ended June 30, 2009, we repurchased 198,000 and 209,000 shares, respectively, of our common stock at a cost totaling $0.3 million at a weighted average price of $1.28 per share.
Conclusion
At its $1.92 close yesterday, DRAD is trading at a small premium to its $32.5M or $1.73 per share in liquidation value. We’re generally sellers of secondary securities trading at a premium to liquidation value, but DRAD seems to have the potential to transition to a cash generator. We’d like to see where it can go. We can see no other reason to cease holding DRAD in the Greenbackd Portfolio and so we’re going to maintain the position for now.
[Full Disclosure: We do not have a holding in DRAD. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
sorry, I was wrong in my ratio for potential appreciation of this stock.
the ratio is 1.66/2.55 = 0.65(2.55$ is what I get for the tangible book value). So we have a potential of 65% in this stock.
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Hi
I’m calculating a ratio TBV/price of 1.53 so the potential of appreciation for this stock is 150% from today’s price (as I’m writing this the stock is trading 1.66$ a share). I do have a DRAD line in my portofolio.
Can you detail more of what you can understand by “cash generator”? Can we fix a target price with this “cash generator” strategy? I’m just amateur with little accounting knowledge, but I’m interested in Graham’s net-net and learning :)
thanks
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DRAD is an interesting play. I looked at yesterday, and unfortunately didn’t bite. Reason: DRAD’s main business, is in personel leasing services to physicians. Read more about it in the 10Q. If you are involved in healthcare you’ll know that this business will mostly likely be completely dead very soon. It’s always operated on the fringe of legal medical care, coming very close to violating Stark. New healthcare regulation will tightly control this business and DRAD’s revenues will plummet. So the current cash-flow is not sustainable.
There is of course a very small probability that regulation won’t interfere with DRAD’s business, and maybe in that case it’s worth something. But it’s unlikely.
Point is: don’t be enamored with the cash-flow, it can disappear quickly. the business is not in the least bit stable and is more than likely taking it’s last gasp of air.
Of course, now the stock will head to $10 :0)
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