With the market enjoying a historic start to 2012, one has to cast a wider net in the search for bargains. But seek and you shall find. I've uncovered a couple of intriguing names that appear absurdly cheap.
Westell Communications (WSTL) produces various broadband and other related equipment for the telecom sector. The company has a market cap of $157 million. As of Dec. 31, 2011 the company had more than $140 million in cash and short-term investments on the balance sheet. Total liabilities are a mere $15 million. Total equity, most of which is cash is $193 million.
Usually when a company trades for an enterprise value of close to zero, it's a sign that the business is flawed or permanently impaired. I don't believe that's the case at all with Westell. For the nine months ended Dec. 31, 2011, revenue was $58 million with operating income of $1.6 million. This compares with revenue of $109 million and operating income of $8.4 million in the prior nine-month period. The year-over-year decline was a result of management's decision to sell off certain assets along with reduced demand in other areas. But what the sale has done is eliminated exposure to slower-growth markets and turned the company into a pure play provider of carrier-class telecommunications products, including digital transmission and remote monitoring services, whose markets have higher growth potential and require less capital expenditure.
At the end of the day you are paying $2.37 a share to get $2.14 a share in cash, tangible book value of $2.90, for a business with a potentially promising future in a growing market. Management is also buying back stock. I've seen many situations like this as well where a special dividend is often declared.
National Presto Industries (NPK) may be a name unfamiliar to today's young investing generation but it is a name that has been around for over 100 years. Your parents and grandparents likely used the company's products and so might you without even knowing it. National Presto makes housewares and small appliances like coffee makers, can openers, electric heaters and timers. The defense segment makes ammunition and provides other services to the Department of Defense. The company has been a cash cow for years, but it's a boring business so it gets little attention from the investment world.
Investors who have taken notice, see anything but a boring business. A market cap of $570 million gets you a business with $150 million in cash and investments and no debt. The company has been profitable during the entire economic crisis and is a cash-flow machine averaging about $50 million in free cash flow a year. Strip out the cash on the balance sheet and you are paying about $400 million for a business that pulls in about $50 million in cash a year, which the company then turns around and pays out to shareholders as a dividend. The current yield of 1.3% is nothing to get excited about, but the company's huge position leaves the door open for options. Shares trade near a 52-week low and value the business at less than 9x free cash flow when you strip out the cash.
