A stock buy-back is a great way for a deeply undervalued company to quickly increase its per share value. After identifying an undervalued asset situation, we look through the company’s filings to see if it has any existing plans authorizing it to buy-back its stock. On the rare occasions when we do locate such plans, we are often struck by (a) how few shares the company is authorized to buy back and (b) how few of the shares the company has actually bought back. InFocus Corporation (NASDAQ:INFS), which we posted about on Friday, is a classic example of this phenomenon.
INFS is trading at a big discount to its liquidation value, it has heaps of cash on hand and no debt, all of which makes it a prime candidate to undertake a big buy-back. Given the substantial discount to its current asset backing, any shares bought back at these levels have a huge positive effect on its per share value. It has just initiated a buy-back plan to repurchase over a three-year period up to 4M shares out of 40.7M on issue. As of September 30, the company had repurchased only 50,000 shares at an average price of $1.53 per share. 50,000 shares is simply too little to have any meaningful impact on the company’s value. We’d argue that even 4M (less than 10% of the outstanding common stock) isn’t enough. Why? Let’s look at what happens if the company repurchases many more shares, say 50% of its issued stock.
In our last blog post, we argued that INFS had a liquidation value of around $1.15 per share, 70% higher than its Friday close of $0.67. The company has cash and equivalents of around $55M and no debt as the summary financials demonstrate (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):
Before
After
If INFS was to repurchase 50% of its stock (20M of its 40.7M shares currently on issue) at $0.67, it would cost INFS only $13.4M, leaving it with nearly $42M in cash on hand:
After the buy back, INFS’s per share liquidating value increases from $1.15 to $1.61 (a 40% increase).
There are very few investment opportunities that so quickly increase a company’s per share value. Given that management should know the company’s value better than the value of any other investment opportunity, it is also the most assured way of increasing a company’s per share value. There is simply no better way for an undervalued company to invest its excess cash than in its own stock.
[…] 23, 2009 by greenbackd We’re often banging on about stock buy backs to anyone who’ll listen. We like them because they represent the lowest risk investment for […]
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[…] deeply undervalued) and the effect of a big buy back on the per share value of the company here (it’s hugely […]
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[…] of the 4m shares as possible as rapidly as possible. Update (December 15): We’ve conducted an analysis of a buy back on INFS’s per share value. In short, if INFS buys back 20M of its 40.7M issued […]
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