rknapton (84.18)

Crazy WACC

November 19, 2008 – Comments (0) | RELATED TICKERS: VOXX , CROX , ADPT

There is actually an IPO coming out tomorrow.  Grand Canyon Education Inc. (LOPE). That is crazy in this market environment.  Stocks are so cheap that issuing a new offering now weighs in far too unfavorably for those looking to raise capital through equity.  And of course debt costs more now too.  Far too many companies have been forced to postpone or cancel their IPOs all together due to the market weakness.

 

The WACC (weighted average cost of capital) is just too high now.  We’ve gone from one extreme with the dot.com bubble which had the WACC being excessively low (due to investors insatiable demand) and investors ended up being ripped off, to now the WACC is so high (due to investors excessive reluctance) that great new innovative companies are having to postpone their IPOs because they can’t afford to be ripped off.  Remember Warren Buffets “wealth transfer on a massive scale” and “birdless bushes” concerning internet stocks back then.  Well, now, due to the massive question marks with regard to pricing derivatives, the credit crunch, the economy, and so on, companies are being valued so cheaply that instead of “birdless bushes”, we have “cages of birds” (I think I’ll trademark that  ;) ) just being given away.

 

This market is ridiculously cheap for investors.

 

During 1932 the pessimism concerning the economy and markets was so great that there were actually companies whose stock traded at values less than their combined cash, inventories, and receivables minus their current liabilities and their long term debt.

 

It would look like this:

 

Market Cap < (Cash + Inventories + Receivables) – (Current Liabilities + LT debt)

 

Basically, if that happened, you could buy the company, wrap the business up and end operations and you’d make a profit for doing that.

 

It’s crazy to think that companies could be valued so little.  And sure enough, when companies traded like this in 1932, it ended up being one of the best times in history to invest in the future of America.

 

Here’s one example of this from 1932.

 

The American Car & Foundry company had $32,341,000 in current assets less all their liabilities, but yet traded at a market cap of just $9,225,000.  They had $108 in net quick assets per share, yet their stock traded down as low as $20.25.  Crazy.

 

But that was 1932… probably the best time ever to invest… it’s not like that would ever happen again... HOLY CRAP!!! There are companies right now in 2008 that are trading like that!

 

Here are some that were featured in Forbes Magazine, and I’ve adjusted the numbers to reflect the devastating prices from today.

 

(VOXX) Audiovox.

They have $11.20 in net liquid assets (the (Cash + Inventories + Receivables) – (Current Liabilities + LT debt) formula from above) per share, but yet the stock is trading at $4.04 as of today, for a 177% premium to market value.

 

(SMOD) Smart Modular Technologies.

The have $3.09 in net liquid assets per share, but trade at $1.29 for a 139% premium to market value.  Not bad for a profitable company that is expected to grow by 12+% for the next 5 years!

 

(CROX) Crocs footware

They have $3.60 in net liquid assets per share, but trade at $1.04 for a 246% premium to market value.

 

(TECD) Tech Data

They have $33.77 in net liquid assets, but trade at $17.60 for a 92% premium to market value.  Not bad for a company that is expected to have $2.46 of EPS in 2010.

 

(NVTL) Novatel Wireless.

They have $6.39 in net liquid assets, but trade at $3.91 for a 63% premium to market value.  This company looks very cheap based on an earnings multiple… but if you dig in deeper, their trailing EV/ EBITA multiple is 0.058.  That is insane.  They have an Enterprise value of just over $2.4 million once you take their $112 million market cap and subtract their cash from that and then add their debt.  Insane.

 

(WMAR) West Marine.

They have $6.95 in net liquid assets, but trade at $4.11 for a 69% premium to market value.  This piece of crap company couldn’t even make money in 2005 or 2006 when times were good and credit was cheap… but with enough global warming we all might need some of their boating supplies as the oceans rise.  JK, this company is a mess.

 

(ZINC) Horsehead Holding

They have $4.67 in net liquid assets, but trade at $2.84 for a 64% increase to market value.  They’ll have losses in 2009, but when demand for commodities comes back –based on the worldwide growth that is happening, this current $28 million EV will look incredibly cheap if they can again return to anywhere near their $90 million of earnings in 2007.

 

(ADPT) Adaptec.

They have $3.53 in net liquid assets, but yet trade at $2.71 for a 30% premium to market value.  This thing is so cheap due to the cash they cash they have just sitting around, that it actually trades at a negative EV.  WOW!  Read that again about 7 times.  Just crazy.

 

(BHE) Benchmark Electronics

They have $12.03 in net liquid assets per share, but trade at $10.28 for a 17% premium to market value.  If the company grows anywhere near the 17+% that the analysts are predicting for the next 5 years, well, that’ll make it’s current ttm earnings yield of 12.5 look like an incredible deal.

 

I do not endorse or suggest purchasing any of these stocks.  I’ve just highlighted these companies’ extremely depressed valuations to show how depressed the entire market is… just like it was in 1932. 

 

So to wrap this up, basically, investors should take advantage of the depressed prices in the market.  It’ll be good for them, and it’s good for lowering the WACC of companies that need to raise capital.  Major averages are down over 40% but yet the U.S. GDP will only shrink a couple percent at most.  There is a huge gap here considering the markets were not just previously excessively overvalued like the NASDAQ of the late 90’s or the DJIA during the late 1920’s.  Our economy is quite different now compared to during the great depression when per-capita real GDP shrank by a full and painful 31%.  That is just not going to happen again.  So for the markets to be off 40%... Well this is looking a lot like 1932 to me.

 

 

RK