Greenbackd

Digirad Corporation (NASDAQ:DRAD) has filed its 10Q for the quarter ended September 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 167% since we started following it to close yesterday at $2.35, giving the company a market capitalization of $36.1M. We last estimated the liquidation value to be around $32.5M or $1.73 per share. We’ve now increased our valuation to $32.9M or $1.77 per share following another very good quarter for DRAD. Year-to-date, DRAD has generated over $3.4M in cash from operations. DRAD has also started buying back stock under its previously announced $2M stock repurchase plan.

The value proposition updated

DRAD has continued its good year, generating $3.4M in operating cash flow year-to-date. 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 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 approved a stock repurchase program whereby we may, from time to time, purchase up to $2.0 million worth of our common stock in the open market, in privately negotiated transactions or otherwise, at prices that we deem appropriate. The plan has no expiration date. Details of purchases made during the nine months ended September 30, 2009 are as follows (Edited to fit this space.):

Conclusion

DRAD is now trading at a reasonable 24% premium to its $32.9M or $1.77 per share in liquidation value. It’s off about 20% from its peak, and looks likely to continue to drop. We’re generally sellers of secondary securities trading at a premium to liquidation value, but DRAD seems to have the started generating cash. 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.]