MEMSIC INC (NASDAQ:MEMS) is a deeply undervalued net net stock and the second installment in our Catalyst Wanted series. At its $1.64 close yesterday, MEMS has a market capitalization of $39M. We estimate its liquidating value to be around 86% higher at $72M or $3.05 per share. Its liquidating value is predominantly cash, so much so that MEMS has net cash of around $62M or $2.60 per share, which is around 60% higher than its stock price.

About MEMS

MEMS provides semiconductor sensors based on micro electro-mechanical systems. Its accelerometers are used to measure tilt, shock, vibration and acceleration in a range of mobile phones, automotive safety systems and video projectors. The company’s investor relations website can be found here.

The value proposition

Like TRID yesterday, MEMS has an veritable treasure trove on its balance sheet (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):


According to its most recent 10Q, MEMS’ cash and equivalents are invested in money market funds and auction rate securities. As of September 30, 2008, MEMS’ investments included $5.8 million of auction rate securities. Auction rate securities are generally long-term fixed income instruments that provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals, typically every 7, 28, 35 or 49 days. These investments have high credit quality ratings of at least AAA/Aaa. Due to recent liquidity issues, certain of the auction rate securities MEMS holds have failed at auction, meaning that the amount of securities submitted for sale at auction exceeded the amount of purchase orders. If an auction fails, the issuer becomes obligated to pay interest at penalty rates, and all of the auction rate securities MEMS holds continue to pay interest in accordance with their stated terms. However, the failed auctions create uncertainty as to the liquidity in the near term of these securities. As a result, MEMS has classified the $5.8 million of auction rate securities it held at September 30, 2008 as long-term investments. We have applied an 80% discount to those securities.

MEMS not have any off-balance sheet financing arrangements other than property and equipment operating leases, the value of which is not disclosed in the financial statements. It does not have any transactions, arrangements or other relationships with any special purpose entities established for its benefit.

The catalyst?

None. MEMS is using the cash on its balance sheet to construction a facility in Wuxi China. The company expects to complerte the first phase in the first quarter of 2009 at a total cost of $6M. The company expects to complete the second phase within three years at a total cost of $30M. Other significant cash outlays primarily consist of salaries, wages and commissions.

The construction of the Wuxi facility, and in particular the second phase of the Wuxi facility, seems to us to be an investment that carries significant risk in the present environment. We’d suggest that a better use for the cash at this time would be to buy back the company’s stock given the huge discount to its cash backing. If the company was to redirect the $30M to stock repurchases at the present stock price, we estimate that the company’s value would increase more than 150%. It might not be realistic to complete the buy-back at this level. If we were to assume a more realistic number, say $2.50, which is 50% higher than the current stock price but still at a discount to its per share cash backing, the balance sheet looks like this:


If the $30M buy-back is completed at $2.50, the liquidating value of the company increases around 20% from $3.05 to $3.60. If we assume that the stock price trades up to the new liquidating value as a result of the company’s new shareholder-oriented management, investors buying in at the present $1.64 stock price see the stock appreciate 120%.


Without a positive catalyst, MEMS will probably remain as a net cash stock for a long time. Despite its deep discount to its cash backing, MEMS is no real bargain without more shareholder-oriented management. This is another stock we’ll keep on our watchlist and let you know if anyone takes it on.

MEMS closed yesterday at $1.64.

The S&P500 Index closed yesterday at 840.24.

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


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