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What's Next for Nortech Systems?

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November 13, 2013 – Comments (0) | RELATED TICKERS: NSYS

Board: Value Hounds

Author: stillwater9999

I have held a very small position in this Minnesota contract manufacturing company for quite a few years (taken prior to the big recession). Despite some recent come back in the stock price, I am still at a loss. Never loved the business here, but by some measures (price to sales of 0.034 at one point) it was very cheap. The other factor is that it came up in my Venerable Owner strategy screens. Chairman and Director Myron Kunin held 51.6% of the float. Kunin was also was a principal at Regis Hair Care. Regis is based in Edina, Minnesota and was founded in 1922 by Paul and Florence Kunin as Kunin Beauty Salon, and renamed Regis in 1958 by their son Myron who acquired the chain. He retired from Regis awhile back and holds no significant stock there.

Mr. Kunin died on 10/30.

http://finance.yahoo.com/news/nortech-systems-statement-pass...

From what I know he has no relatives involved in the company. The shares should pass to his estate. I think there is a reasonable possibility that the estate will move to sell the whole company in order to capture full value of the stake.

Financial results for the company took a big hit with the recession (lost $1.40/share in 2009), although they were never in an real danger of going out of business. The company has seen reasonable improvement in more recent years and has entered some new markets. Here is the most recent earnings statement:

http://finance.yahoo.com/news/nortech-systems-reports-second...

The stock is very thinly traded and can see sudden sharp spurts after a good quarter. They hold earnings conference calls and typically there are zero questions. However after one strong quarter, a number of analysts and investors showed up only to disappear the next quarter.

By many measures the stock is still pretty cheap even given that this is not a great business. P/B is 0.62 and P/S is 0.13. One recent rare article on the company thinks it is cheap:

http://seekingalpha.com/article/1636812-nortech-systems-prop...

NSYS has the current sales breakdown (2012 year):
Industrial: 55%
Medical: 30%
Aerospace and defense: 15%
Total sales were about $107MM. Current Market Cap is only $13.2MM.

FCF has been erratic although in a number of years it has been around 0.50/share. Current stock price is about $4.90.

The company has one large customer (I believe this is GE) that contributes about 24% of sales. NSYS owns 5 significant manufacturing facilities in Minnesota and Wisconsin. (240,000 sq. ft.) Property and Equipment are listed at $11.2 MM on the balance sheet. LT debt is about $4 MM per the latest 10-Q. Funds from operations have been sufficient to fund the debt. The company also has some operations in Mexico where they lease a facility.

I did some past work on deals in this area and I am trying to find some new comps. Terms for most of the deals are not disclosed. There are a number of potential acquirers including some private equity groups. There have been rumors for years of a possible GE take-over. Not sure about that. Also rumors that Kunin would take it private in view of the low valuation and lack of interest in the market. That will not happen.

I added a bit on the news of Mr. Kunin's passing. As noted above the stock is very thinly traded and limit and All or None orders would be highly recommended.

sw

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