Every so often I stumble upon a business that at first glance seems unremarkable, but upon closer look, reveals itself to be a potentially intriguing opportunity.
Such is the case with Tecumseh (TECUA), which produces and provides compressors. Tracing its roots back to 1937, the Michigan-based company began with a focus on compressors for commercial refrigeration and central home air conditioners. Over the years, Tecumseh continued to innovate, invest in R&D, and maintained its focus on manufacturing compressors not only for refrigeration and home AC purposes but also for cooling automobiles. From there, the company expanded into related areas such as heat pumps, coils, complete air-conditioning (AC) and refrigeration systems, and manufacturing the related spare parts. The company has operations and research-and-development (R&D) locations throughout the globe.
Compressors make refrigerant gas functional. Without them, your AC unit won't cool your house, your refrigerator won't preserve your foods, and you can forget about automobile air conditioning. Tecumseh earns approximately 80% of its sales outside of North America. Approximately 60% of its sales are derived from commercial customers while the remainder come from residential business.
The recession has been brutal on the company and the shares today trade for around $4.30, off from $11 a year ago, giving the company a market cap of $79 million. Sales have declined from $1.1 billion in 2007 to $830 million in 2011. The company has reported net losses for the past five years. A clean balance sheet has managed to keep the company afloat: It has $50 million in cash vs. $5 million in debt. Equity stands at over $230 million, implying a price-to-book ratio of 0.27.
So where's the catalyst or value potential for a company that is consistently unprofitable and facing declining sales? Aside from hopes of an economic improvement or a reduction in commodity prices (namely copper and steel), Tecumseh's results are being weighed down by the residential side of the business. More so, a large shareholder is now pressing for the company to sell off the residential business and keep the profitable cash flow steady commercial business. In a Securities and Exchange Commission (SEC) filing, this shareholder, Roumell Asset Management, stated that it has engaged a consulting firm to take a deep look at Tecumseh's operations and assets as well as the industry and company's position in the marketplace.
The conclusion was that Tecumseh's business was worth between $13 and $16 a share, vs. $4.30 today. Given that this shareholder owns more than 20% of the company, it's fair to say that a significant catalyst exists today. In addition, the wide disconnect between today's price and the potential liquidation price makes for a favorably skewed risk/reward scenario.