Player Avatar FRRElement (99.26) Submitted: 4/2/2008 12:20:03 AM : Outperform Start Price: $11.16 VOXX Score: -80.57

With the use of Audiovox as an example I would like to introduce a Theory of Benjamin Graham's, , which Seth Klarman has named Net Net Working Capital. The theory is rather simple but very complicated to implement.

Here is the Formula

Net Net Working Capital = Total Current Assets – Total Liabilities

What one is trying to do with such an investment tactic is buy stocks that are selling for or at below the value of their Current Assets alone after subtracting Total Liabilities. Then the idea is to divide the result by the number of shares outstanding. If the result is equal to or less than the current market value then the stock is considered cheap. I have experimented with the theory above and have had great success.

I have also lost a lot of money using the strict theory alone. Thus I believe I have improved on the theory by adding some real world additions to it.

On the Total Current Assets part of the Formula I use the following modifications.

Cash ===> I use 100% of the amount listed on the balance sheet

Accounts Receivable ==> I multiply the amount by 75%

Inventory ===> I multiply that amount by 50%

All others I consider at $0

The Addition I added to Grahams Formula is including Property and Equipment into the equation for in the real world , a liquidation of Property and Equipment would be considered .

Thus ;

Property and Equipment ===> I multiply that amount by 50%

I thus multiply each by a certain percentage as to make real what those assets would be worth to a buyer in a total liquidation. Cases may vary depending on the product but using the percentages above I have averaged all types of businesses and found as to what I believe to be the mean or average that works.

Thus the new Formula reads;

[ Cash (100%) + AR(75%) + INV(50%) + P&E(50%)] – Total Liabilities
Diluted Common Shares Outstanding

That is my entire work in a simple formula. It is almost impossible in good times to find stocks selling at total liquidation values, but in miserable or average markets these stocks pop up.

Audiovox (VOXX) is a company that is close to meeting our criteria as listed above and here are the results that show how attractive it is.

Cash ====è $ 20,669,000 value at 100% ===> $ 20,669,000

Short Term Investments ===è $ 8,277,000 value at 100% ====> $ 8,277,000

Net Receivables ===è $ 187,651,000 value at 75% ====> $ 140,738,250

Inventory ===è $ 147,830,000 ====> value at 50% =====> $ 73,915,000

Long Term Investments ===> $ 27,417,000 ====> value at 50% ====> $ 13,708,500

Property Plant and Equipment ===> $ 21,181,000 ===è value at 50% ===> $ 10,590,500

Total Liabilities ===> $ 104,857,000

Shares Outstanding ===> 22,850,000

So add $20,669,000 + $8,277,000 + $140,738,250 + $73,915,000 + $13,708,500 + $ 10,590,500

And you get $ 267,898,250

Now if you minus $ 104,857,000 from $267,898,250 you get $ 163,041,250

$ 163,041,250 / 22,850,250 = $ 7.13

So we have discovered that Audiovox’s Net Net working value = $7.13 which means in a total liquidation the stock would liquidate at $7.13.

So having that buffer as a worst case scenario we see Audiovox worth a lot more especially when you factor in the latest deal that they signed with Energizer holdings.

I think this is the unique type of investment that Benjamin Graham would have purchased were he alive today.

Report this Post 2 Replies
Member Avatar LEXLUTH0R (90.44) Submitted: 10/10/2008 6:33:29 PM
Recs: 0

If you and I can raise 100 Mil, Id love to take over this company at $4 and liquidate. We could retire.

Member Avatar throwerw (29.44) Submitted: 2/4/2009 2:08:12 PM
Recs: 0

i can see why you have lost a lot of money using that theory. graham wouldn't buy the company for any more than 2/3 of net net working capital. in his book, klarman suggests half. now is a good time to buy. good explanation of the formula. have you ever used i've found that it's a good place to start, that's how i found voxx

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