Digirad Corporation (NASDAQ:DRAD) is a tiny undervalued asset play with a plan to sell assets and buy back its stock. At its $0.88 close on Friday, the company has a market capitalization of $16.7M. We estimate the liquidation value to be around 76% higher at $29.3M or $1.55 per share. The company’s net cash value is around $16M or $0.85 per share, which means the company is trading at a small premium to its net cash. DRAD plans to put the cash to good use, announcing a share buyback to repurchase $2M of its stock.
About DRAD
DRAD is a provider of cardiovascular imaging services and solid-state nuclear medicine imaging products to physician offices, hospitals and other medical services. The company operates through its wholly owned subsidiaries, Digirad Imaging Solutions, Inc. and Digirad Ultrascan Solutions, Inc. The company’s investor relations website is here.
The value proposition
DRAD’s earnings and cash flow are nothing to write home about. The company generated positive cash from operating activities for the last two years of $4.72M in 2007 and $2.37M in 2008, but capital expenditures have made the company a net consumer of cash. The summary of our 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):
We estimate DRAD’s liquidation value at around $29.3M or $1.55 per share.
Off balance sheet arrangements and contractual obligations
The company hasn’t disclosed any off-balance sheet arrangements in its most recent 10K. The contractual obligations as at December 31 were around $3.0M, around $1.4M of which falls due in the next 12 months.
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.”
The impact of a $2M stock buyback at Friday’s closing price is to increase per share liquidation value by around 6% to $1.64 and leaves the company with $26.3M in cash and short term investments. We’d like to see a larger buyback (for example, $5M increases the per share value by around 20% and leaves $23.3M in cash), but this is a good start.
Conclusion
At its $0.88 close on Friday, DRAD is trading at around 57% of its $29.3M or $1.55 per share in liquidation value and at a small premium to its $16M or $0.85 per share in net cash. The share buyback to repurchase $2M of its stock will increase the per share liquidation value by around 6% to $1.64. We’re adding DRAD to the Greenbackd Portfolio.
DRAD closed Friday at $0.88.
The S&P500 Index closed Friday at 683.38.
Hat tip to JM.
[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.]
I just discovered this website. Great information. I’ve been interested in net-nets for some time, although my personal portfolio is not invested in a basket of them like Graham would suggest. (I’d like to do this, but I’m dealing with limited assets….and I prefer to focus my investments at this point in time.)
With that said my largest holding is a net-net stock. Actually this is a security that was issued to the pre-bankruptcy common stockholders of a company called Comdisco Holdings.
The two securities to look at are CDCO.OB (the new common stock of Comdisco that was issued to the old bondholders) and CDCOR.OB (The old equity interest in Comdisco which share in proceeds of the liquidation of Comdisco after a certain $$ amount has been paid to the holders of CDCO…..at this point the threshold has been met and CDCOR will participate in 37% of future distributions.)
Basically this company is going through a drawn out liquidation process (it’s been going on for at least a few years) in order to fully maximize shareholder value. There’s no question about the liquidation because it’s required by the bankruptcy court.
Right now you can buy CDCO or CDCOR at a discount to cash value (although unless I’m missing something CDCOR should be worth just over a third of CDCO in the aggregate because it’s entitled to 37% of future distributions)….right now CDCOR is cheaper, but very illiquid (the aggregate value of the security last time I checked was around $13 million.)
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It’s an interesting situation, Jonathan. We’ll have a look at it.
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Thanks….I’ll be interested to see what you think.
If you need to find a 10-K look under CDCO (this is actually the common stock….CDCOR is called a contingent distribution right or CDR throughout the 10K.)
On the CDCO balance sheet you’ll notice a liability under “Other Liabilities” of $22,418.
If you read the 10K you’ll realize that this is actually management’s estimated liability to the CDR holders (CDCOR).
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This is actually a good idea to research further. Thanks very much for the tip. The company actually has a viable business and is selling way beneath cash (as opposed to other stock ideas here where the businesses are not in the least bit viable). Also, I looked at their cash-flow statement and their cap-ex level is not so out of line and is covered completely by depreciation and amortization expense, so it’s not a negative in the least bit. Now will have to do more research.
As an aside, it’s nearly impossible to accurately calculate liquidation values from balance sheets, SEC filings etc. and if you’ve ever lived thru a real-life liquidation in modern times (Benjamin Graham lived in an entirely different era), you’d see that in 99% of the cases you’ll end up with almost nothing. So again, it’s vitally important to see if a company has some slight potential of a viable business or you’ll get majorly screwed in these types of net-nets.
Incidentally, Graham’s track record managing money based on net-net’s, even during a different era, was abysmal. His only investment that saved him was Geico. And that was never a net-net, and he only was saved there because of Buffett (who nearly always looked more at the viability of the business, rather than just the liquidation value).
Graham was really the first quant, so to speak. Using a purely numbers approach and a diversified portfolio to beat the market. But he didn’t have great computer skills, and so failed in his approach (though the idea is very viable). The quant game nowadays is vastly improved from Graham’s days, but unfortunately impossible for the average investor with less than $100 million to even consider.
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Thanks, eg. We’re aware of the effect of Geico on Graham’s record. We suspect that all investors’ portfolios follow what we would call the venture capital portfolio model: out of ten investments, one or two are blockbusters, two or three do well, three or four break even, two or three lose money and one or two fall over. If you take out the blockbuster, the whole record looks pretty shabby. There are countless investors who’ve successfully followed this strategy, including a few we’ve covered on this site. We’ve seen too many Buffett-style stocks fall back to earth to believe that we can value future earnings. We’re also wary of investing in Buffett-style stocks because they don’t signal the top of the market. They look strongest at the top of the market. The liquidation stocks dry up at the top of the market, which means we can’t find any opportunities and are forced to sit in cash – which is a good time to keep one’s powder dry for inevitable drop.
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