Greenbackd

Digirad Corporation (NASDAQ:DRAD) has filed its 10Q for the quarter ended March 31, 2009.

We’ve been following DRAD (see our post archive here) because it is an undervalued asset play with a plan to sell assets and buy back its stock. The stock is up more than 43% since we started following it to close yesterday at $1.26, giving the company a market capitalization of $23.9M. We initially estimated the liquidation value to be around $29.3M or $1.55 per share. After reviewing the Q1 10Q, we’ve left the valuation essentially unchanged at $29.5M or $1.56 per share. The company’s net cash value is around $15.6M or $0.82 per share. DRAD has announced a plan to repurchase $2M of its stock, but it has not yet repurchased a material amount of stock.

The value proposition updated

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):

Balance sheet adjustments

We make the following adjustments to the balance sheet estimates above:

• Cash burn: The company used $0.6M in cash in the first quarter. We have not included any cash burn in our estimate as DRAD’s first quarter’s cash burn was primarily due to a seasonal increase in DRAD’s inventory and a reduction in its accrued compensation and other liabilities and we do not expect this to be repeated in the second quarter.
• 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.”

According to the most recent 10Q, the company has not bought back a material amount of stock:

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 and contractual requirements, and other factors. During the three months ended March 31, 2009, we repurchased 11,000 shares of our common stock at a cost totaling $11,000.

Conclusion

At its $1.26 close yesterday, DRAD is trading at around 81% of its $29.5M or $1.56 per share in liquidation value. We see no reasons to cease holding DRAD in the Greenbackd Portfolio and so we’re going to maintain the position.

[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.]