Blonder Tongue Laboratories
1. Company Summary: BDR designs, manufactures and supplies electronics and systems equipment for the cable television industry, throughout North America. Its products include analog and digital headends, fiber products, and distribution products.
2. Strengths and Weaknesses:
- BDR is transitioning production to China and in the process realizing improved gross margins. 2000-2008 average historical COGS were 65.6%; 2009 COGS reduced to 61.2%. Management expects this trend to continue.
- The United States government mandated a transition to digital television beginning June 12, 2009. As multi-dwelling units and institutional users upgrade their equipment to digital, demand for products like BDR will increase substantially. This process has been slow given the state of the economy and reluctance to make capital investments.
- BDR insiders have substantial stakes in the company (Subject to note below re. CEO). For example, the President currently owns 18.32% and the CEO holds 10.38% (Again, see below).
- Management Impropriety: BDR’s Board approved interest-free loans to its CEO until 2002. In 2008, its CEO declared bankruptcy (personally), and it is questionable whether these loans will be repaid. This calls into question the quality of management and the board of directors’ oversight.
- The CEO’s 11.75% ownership of the company is now pledged to his creditors (including, to a small extent, BDR itself). This calls into question the CEO’s interest in the company. Alternatively, these creditors could potentially act as a catalyst for change should they take control of the shares.
- Concentrated Revenues: BDR’s top five customers accounted for 58% of its revenues.
- BDR has operated with negative cash flow from operations for four quarters (due to increases in inventory not expected to continue, and increases in accounts receivable likely attributable to the economy).
a) Intrinsic Value as Reproduction of Cost of Assets
I adjusted the firm’s last quarterly balance sheet to estimate the cost of reproducing the firm’s assets. I added a 0.5x multiple of the 10-year average SG&A expense as a non-current asset to reflect the cost of reproducing the firm’s research, operations and marketing activities. I also included operating leases as a liability. The result was equity valued at $3.07 per share.
b) Intrinsic Value as Earnings Power
In estimating the value of the firm’s earnings power, I used different revenue scenarios including average revenue for the last five and ten years. I used a COGS ratio slightly higher than 2009, in case the move to Chinese production becomes more expensive (should China revalue the Yuan). I calculated free cash flows of between $1.1 – 1.4m per year. Treated as a no-growth perpetuity using a WACC of 8.5%, I calculated the value per share to be between $1.15 and $1.59.
Estimated intrinsic value is between $1.15 and $3.07. It currently trades around $1.00, representing a 13% – 67% discount. Given the conservatism built into my valuations, this is a sufficient margin of safety and I will be looking for an exit in the high mid/high $1 range.
Author Disclosure: At the time of publication, the author DOES have a position in securities of this company.