Greenbackd

Rackable Systems Inc (NASDAQ:RACK) has filed its 10K for the year ended January 3, 2009.

We’ve been following RACK (see our post archive here) because it is an undervalued asset play with a plan to repurchase almost 40% of its stock. The stock is up 10.1% from $3.56 when we added it to the Greenbackd Portfolio on March 11 this year to close yesterday at $3.92. The company now has a market capitalization of $117.2M. We initially estimated the company’s liquidation value to be 46% higher at $171.6M or $5.74 per share. We’ve now had an opportunity to review the 10K and see no reason to vary our initial estimate. If the buy back is completed at the current stock price, the company’s per share liquidation value will increase by 17% to $6.69, which presents considerable upside from the present price.

The value proposition updated

RACK has had a tough year, burning through $15.7M in the 12 months to January 3, 2009. The company’s value resides in the huge amounts of cash and equivalents on its balance sheet, much of which is from the $138.5 million follow-on public offering completed in March 2006. Set out below is our estimate of the company’s liquidation value (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 the company’s liquidation value to be around $171.6M or $5.74 per share, which is predominantly cash and equivalents in the amount of $172M or $5.75 per share. RACK’s net cash value is around $118M or $3.95 per share.

Off balance sheet arrangements and contractual obligations

According to the 10K, the company has no off-balance sheet arrangements. The contractual obligations as at January 3, 2009 were around $17.1M, around $9.5M of which falls due in the next 12 months. Those committments are $2.0M minimum lease payments under the company’s operating leases and $7.5 in purchase obligations. The company also had purchase committments in the amount of $7.6M in total.

Catalyst

According to the 10K, RACK plans to buy back almost $40M of its own stock:

In February 2009, our Board of Directors authorized a share repurchase program of up to $40 million of our common stock. The duration of the repurchase program is open ended. Under the program, we are able to purchase shares of common stock through open market transactions and privately negotiated purchases at prices deemed appropriate by management. The timing and amount of repurchase transactions under this program will depend on market conditions, corporate and regulatory considerations, alternative investment opportunities, and other relevant considerations. The program may be discontinued at any time by the Board of Directors. Shares we repurchase will be held in treasury for general corporate purposes, including issuances under employee equity incentive plans.

Conclusion

We like it when a company recognizes that its stock is deeply undervalued and takes radical action to capitalize on it. If the market is pricing a company’s stock below its liquidation value, the company’s priority should be investing in its own stock. With its stock at $3.92, RACK has a market capitalization of $117.2M, which means it’s trading at a discount to both its net cash value of $118M or $3.95 per share and its liquidation value of $171.6M or $5.74 per share. The cash burn is a risk, but we’re going to retain RACK in the portfolio.

[Full Disclosure:  We do not have a holding in RACK. 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.]