An actual resolution for 2013 is to post more frequently. Many good ideas have come from people emailing me or commenting. Also, may insights that I wasn’t able to pick up on have come from having PettyCash. I will endeavor not the let the blog go stale.
I stumbled on PTIX when I started looking at low EV/Sales companies trading below TB. As much as this is a post about a company, I wanted to see if anyone either a) knows more about the industry and is willing to share and/or b) how other investors approach their margin of safety if the primary valuation method is asset based.
Company description (from company website):
“PT is a global supplier of advanced network communications solutions to service provider, government, and OEM markets. The company’s award-winning products include IP-centric network elements and applications designed for high availability, scalability, and long lifecycle deployments.”
To be completely honest, I know very very little (if not less) about the company’s products and its place within the industry. So, even if I was to take a position it would not be major.
The company has had a tough time over the last 10 years. All you have to do is punch in their ticker into Morningstar here.
Here is what the income statement has looked like over the last 10 years.
As you can see…ugly. Shown below is any growth in per share numbers. I find this useful as even if a company is losing money by GAAP standards, they may still be growing asset value.
This chart sums up half of the reason why I am scared of PTIX. Right now PTIX is trading at less than net cash and 0.56x NCAV. These 2 valuations should give me comfort, but don’t. Why not?
Why am I skeptical of PTIX as an investment
1) One is the previous chart shows that even with a flat share count TB and NCAV have dropped on a per share basis. This means that any margin of safety based on asset valuation will be eaten into by any poor business performance. This is something that concerns me with another company I own, LGL.
2) There is a shareholder rights plan that was just extended until Nov 2015. It was slated to expire in Nov 2012. This takes away one (very important) catalyst for net cash companies, the potential for someone to buy it and liquidate. The CEO and former CEO (who is on of the board) own about 12% of the company and I think they don’t want the company they built to get wound down, even if it made economic sense.
Though it’s not all bad
There are some reasons to be hopeful.
1) Compensation is not outrageous. Though getting some VPs and Executives to take more compensation in the form of long dated out of the money options would align interests and stop some of the cash bleeding.
2) There is some insider ownership. Current CEO and former CEO around 12%.
3) Management and the board have made steps to stop the bleeding. They have taken some restructuring charges related to laying off staff. This shows that they at least are concerned about the company to operate as a going concern. R&D and marketing expenses have also dropped.
To be forthcoming, 2012 was a disaster for me. 2010 and 2011 were not great years either. I am convinced I have the mental intelligence to be successful at investing, but lack a proper framework to not only pick proper risk reward scenarios but also how to size them in the overall portfolio. I am convinced that I need a better mechanism on how to approach risk for stock selection and position sizing.
I am passing on PTIX as I feel the risk is too great. Hindsight may make me look foolish, but I can’t get comfortable with PTIX from a risk perspective. If there are any comments, please feel free to post them or email me.
Disclosure: The author is long LGL and has no position in PTIX.