A Big Name Returns to Net-Net Land

 | May 14, 2012 | 10:30 AM EDT  | Comments
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Lots of excitement at the New Jersey shore this weekend as we viewed the early results of efforts to replenish the beaches, raise the dunes and strengthen the buffer between the mighty Atlantic Ocean and a one-mile stretch of the barrier island that my family has traversed for more than 60 years. It's quite an operation, and I hope it works.

When they started working on another part of the island six years ago, someone forgot to put a filter on the tube that blows massive quantities of sand from the ocean floor, onto the beach. The result was that hundreds of World War II-era munitions also found their way to the beach. That meant a massive cleanup effort, in order to avoid the possibility of a very unpleasant surprise.

There was also some excitement in net-net land this past week as well, as one of the biggest net-nets (companies trading below net current asset value) rejoined the list that no company would ever join by choice. Last week, the information technology and supply-chain name Ingram Micro (IM) dipped down to 0.98x NCAV. This company has been an all-too-frequent visitor to net-net land since 2008.

 A company of Ingram's size trading below NCAV is still a rarity in the many years that I've been researching, investing in and pontificating on this deep-value technique. Not only does Ingram have a market cap of $2.84 billion, it is also profitable. Typical current net-nets have been money losers and all but forgotten by investors. With these, you look for signs that there's some life left, some undervalued assets or a business that may be able to recover. Ingram is completely different, trading at 10.5x trailing earnings, 4x enterprise value to EBITDA, less than 7x free cash flow and 8x 2013 consensus earnings estimates.

One of the knocks on the company is that its net margins are very low, typically below 1%. But this is a very high-volume business that generated more than $36 billion in revenue for 2011. What's more, the balance sheet is very strong. Ingram ended the first quarter with $991 million, or $6.57 per share, in cash, and just $388 million in debt, $300 million of which is long-term, due in 2017. Net-nets typically trade below book value by their very nature; Ingram currently trades at just 0.84x tangible book value.

The company has also been buying back stock and has reduced shares outstanding by more than 12% since year-end 2007. Ingram currently has another $174 million authorized for buybacks over the next year and a half, although management has recently stated that at this point it is more biased toward reinvesting in the business than buying back shares.

How about initiating a dividend and halting or curtailing the buybacks? That would send a positive signal to the markets, and the company has both the cash and cash flow to make it happen. This move might also demonstrate some confidence by management, return a little something to shareholders and perhaps be the catalyst that lifts Ingram out of net-net land for good.

Just saying...

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