MSN - Emerson Radio

[aws]

Emerson Radio (MSN).  The company has a very long history, but it’s now a tiny fraction of its former self.  They went bankrupt around 20 years ago.  They started making some decent money after their reorganization, but then the majority shareholder sold out to a shady Chinese company.  The Chinese controlling company was accused of self-dealing among other things.  3.5 years ago the Chinese controlling company went bankrupt and since then the company has been controlled by the Provisional Liquidators, but this hasn’t seemed to affect business much.  With all this uncertainty they have often traded at huge discounts to book and even at negative enterprise values at times.

 

They aren’t currently trading at negative EV, but it may appear that way at first glance.  If you look at their 6/30/14 balance sheet you have to subtract $19 million in cash and equity because they just paid out a special dividend.  What’s left is net assets available to common shareholders of $1.98, and it’s mostly all current assets with no debt.  The stock is currently trading at around $1.20, having dropped around 40 cents not counting the dividend over the past three weeks.  I think the immediate cause for the drop is just a demand imbalance.  People bought it after they announced the big dividend, hoping it would go down less than the dividend presumably, and now they are disappointed and are selling out.  I’ve tried to value the company and I ended up coming up with a value of $1.99 which I will explain below.  I think there is a very good chance the value is unlocked in the near future.  The big dividend was the first step – hopefully there are further actions of the sort. 

 

The most attractive thing I see is that they get licensing revenue from their trademarks.  They are guaranteed $3.75 million a year until 2018, or a percentage of sales, whichever is greater.  This has worked out to around $7 million a year pretax, and that should be almost all profit.  Conservatively the licensing alone should be worth at least 50 cents a share.  If it lasted forever I could see valuing this alone at nearly the current market cap of the company. 

If the product sales could cover all of their costs and contingencies then we would have a very good opportunity.

 

First I looked at cost of sales after stripping out all licensing revenue.  For the past four years this has averaged 89.7%.  In the last five quarters it’s ticked up a bit, and it averaged 90.2%.  The past five quarters are significant because those are the ones since they’ve lost their biggest customer which caused sales to be cut in half.  That’s not really unexpected since they purchase goods for resale instead of manufacturing themselves, but it’s good to see that margins aren’t eroding.

 

Next I looked at SG&A expenses.  Unfortunately these have actually increased pretty substantially despite revenues being cut in half.  As a percentage of product sales they went from 4% in 2011, to 5% in 2012, to 7% in 2013, to 17% in 2014.  Over the past five quarters they have averaged 15%.  That’s clearly not looking good.  Reasons for the increases over the past five quarters were:

 

$1.8 million in legal bills for a lawsuit settled last year (this cost should not recur, but I don’t think all the risk related to what brought the lawsuit is gone - it's related to the shady bankrupt owners)

 

$1.8 million in legal and advisory bills for the Special Committee of the Company’s BoD which was created to “enhance stockholder value”.  I’m not a huge fan of these types of expenses, but the special committee appears to have been the driving force behind the 70 cent dividend, and hopefully they can create enough additional value to justify this cost

 

$0.2 million in tax advisory fees to fight a potential $15 million tax liability.  The company has not accrued the contingency for this tax because they say they are more likely than not to successfully fight it

 

If you can strip all of this out then SG&A goes to 10.6% of sales.  That’s already up to 100.8% of net product sales, plus they have other operating expenses of 1.4%, meaning that even without any extraordinary expenses that net loss from product sales and overhead is around 2.2% when I was hoping they could get to breakeven or better.  That’s not insurmountable or an actual cash burn because they do still have the licensing revenue, but I was trying to value that separately.  As it is you have $57 million of assets employed in one business that looks like it’s on track to lose about $2 million a year from operations, and then a separate licensing business that generates $7 million a year at no cost.

 

It certainly looks like the best course of action is for them to quit trying to sell their own products and just focus on licensing.  That may not be entirely feasible because they would still have overhead even with no product sales, and their long-term ability to license their trademark may not hold up without a product line of their own.  I wouldn’t say it’s urgently required that they try to convert right away either.  There would be much more long-term value for shareholders if they could get back to a position like they were in 3 or 4 years ago where they were making 10 or 15 million pretax from product sales instead of liquidating. 

 

There are three broad scenarios I see that could play out.  I don’t really know how to weight them, but here goes:

 

15% - the company recovers to 2011 sales levels over time.  They start making around 15 million a year after tax and the company is worth something like $150 million, or about $5.50 a share

 

75% - the special committee eventually decides the best option is to liquidate and live off the licensing revenues.  There’s $53.5mm in net assets for common shareholders right now, and licensing revenue grosses around $7 million pretax.  To value that I’m going to very conservative and assume they will burn up around $25 million of that in a combination of operating losses, legal bills, tax assessments, and any other contingencies.  That would leave $28.5 million or around $1.05 per share.  And then on top of that I would add my 50 cent valuation on the licensing business to get to $1.55.

 

10% - Goes to zero.  Maybe another lawsuit related to their bankrupt majority shareholder or other unforeseen circumstances.

 

My weighted calculated value would be 15% x $5.50 + 75% x $1.55 = $1.99.

 

[SpecOps]

I looked at it a year ago when it was selling for less than its net cash, but too many red flags for me, management was very dodgy. I wrote an article on it here http://investingsidekick.com/emerson-radio-amexmsn/

[aws]

This stock hasn't really done anything since the special dividend but that may change tomorrow.  Results for last quarter were just posted.  Highlights are quarterly earnings of 11 cents, net current assets of $2.02 per share, on a stock trading at $1.06. 

 

Licensing revenue is up almost 1mm over the same quarter last year. Hopefully that continues to accelerate.  Gross margins are a bit better and there are no big legal charges like there have been for many quarters in the past. 

[yadayada]

nvmind found it.

 

How you get comfortable with that shady guy that owns more then half the stock?

[HIPS]

Thanks for flagging this up. Really interesting company. To save the long post I have linked my thoughts on the stock here

 

https://hidinginplainsightblog.wordpress.com/

 

My main outstanding question is whether anyone was able to get any comfort around the three different tax liabilities. It seems very difficult to call particularly as Emerson's legacy accountants, MSPC, are still their auditors and likely advising them on these matters and therefore I can take no comfort from the board putting a low probability of an IRS victory on the largest (NOPA 1) due to MSPC's extremely reputation.

 

The controlling shareholder is a bad dude and I totally get why that is a red line for people but I think at today's price you are getting adequately compensated for the risk. At the $1.00  trading lows this was one of the most compelling opportunities I have come across in recent months.

[Guest Schwab711]

Emerson Radio (MSN).  The company has a very long history, but it’s now a tiny fraction of its former self.  They went bankrupt around 20 years ago.  They started making some decent money after their reorganization, but then the majority shareholder sold out to a shady Chinese company.  The Chinese controlling company was accused of self-dealing among other things.  3.5 years ago the Chinese controlling company went bankrupt and since then the company has been controlled by the Provisional Liquidators, but this hasn’t seemed to affect business much.  With all this uncertainty they have often traded at huge discounts to book and even at negative enterprise values at times.

 

They aren’t currently trading at negative EV, but it may appear that way at first glance.  If you look at their 6/30/14 balance sheet you have to subtract $19 million in cash and equity because they just paid out a special dividend.  What’s left is net assets available to common shareholders of $1.98, and it’s mostly all current assets with no debt.  The stock is currently trading at around $1.20, having dropped around 40 cents not counting the dividend over the past three weeks.  I think the immediate cause for the drop is just a demand imbalance.  People bought it after they announced the big dividend, hoping it would go down less than the dividend presumably, and now they are disappointed and are selling out.  I’ve tried to value the company and I ended up coming up with a value of $1.99 which I will explain below.  I think there is a very good chance the value is unlocked in the near future.  The big dividend was the first step – hopefully there are further actions of the sort. 

 

The most attractive thing I see is that they get licensing revenue from their trademarks.  They are guaranteed $3.75 million a year until 2018, or a percentage of sales, whichever is greater.  This has worked out to around $7 million a year pretax, and that should be almost all profit.  Conservatively the licensing alone should be worth at least 50 cents a share.  If it lasted forever I could see valuing this alone at nearly the current market cap of the company. 

If the product sales could cover all of their costs and contingencies then we would have a very good opportunity.

 

First I looked at cost of sales after stripping out all licensing revenue.  For the past four years this has averaged 89.7%.  In the last five quarters it’s ticked up a bit, and it averaged 90.2%.  The past five quarters are significant because those are the ones since they’ve lost their biggest customer which caused sales to be cut in half.  That’s not really unexpected since they purchase goods for resale instead of manufacturing themselves, but it’s good to see that margins aren’t eroding.

 

Next I looked at SG&A expenses.  Unfortunately these have actually increased pretty substantially despite revenues being cut in half.  As a percentage of product sales they went from 4% in 2011, to 5% in 2012, to 7% in 2013, to 17% in 2014.  Over the past five quarters they have averaged 15%.  That’s clearly not looking good.  Reasons for the increases over the past five quarters were:

 

$1.8 million in legal bills for a lawsuit settled last year (this cost should not recur, but I don’t think all the risk related to what brought the lawsuit is gone - it's related to the shady bankrupt owners)

 

$1.8 million in legal and advisory bills for the Special Committee of the Company’s BoD which was created to “enhance stockholder value”.  I’m not a huge fan of these types of expenses, but the special committee appears to have been the driving force behind the 70 cent dividend, and hopefully they can create enough additional value to justify this cost

 

$0.2 million in tax advisory fees to fight a potential $15 million tax liability.  The company has not accrued the contingency for this tax because they say they are more likely than not to successfully fight it

 

If you can strip all of this out then SG&A goes to 10.6% of sales.  That’s already up to 100.8% of net product sales, plus they have other operating expenses of 1.4%, meaning that even without any extraordinary expenses that net loss from product sales and overhead is around 2.2% when I was hoping they could get to breakeven or better.  That’s not insurmountable or an actual cash burn because they do still have the licensing revenue, but I was trying to value that separately.  As it is you have $57 million of assets employed in one business that looks like it’s on track to lose about $2 million a year from operations, and then a separate licensing business that generates $7 million a year at no cost.

 

It certainly looks like the best course of action is for them to quit trying to sell their own products and just focus on licensing.  That may not be entirely feasible because they would still have overhead even with no product sales, and their long-term ability to license their trademark may not hold up without a product line of their own.  I wouldn’t say it’s urgently required that they try to convert right away either.  There would be much more long-term value for shareholders if they could get back to a position like they were in 3 or 4 years ago where they were making 10 or 15 million pretax from product sales instead of liquidating. 

 

There are three broad scenarios I see that could play out.  I don’t really know how to weight them, but here goes:

 

15% - the company recovers to 2011 sales levels over time.  They start making around 15 million a year after tax and the company is worth something like $150 million, or about $5.50 a share

 

75% - the special committee eventually decides the best option is to liquidate and live off the licensing revenues.  There’s $53.5mm in net assets for common shareholders right now, and licensing revenue grosses around $7 million pretax.  To value that I’m going to very conservative and assume they will burn up around $25 million of that in a combination of operating losses, legal bills, tax assessments, and any other contingencies.  That would leave $28.5 million or around $1.05 per share.  And then on top of that I would add my 50 cent valuation on the licensing business to get to $1.55.

 

10% - Goes to zero.  Maybe another lawsuit related to their bankrupt majority shareholder or other unforeseen circumstances.

 

My weighted calculated value would be 15% x $5.50 + 75% x $1.55 = $1.99.

 

50% * $1.55 + 1% * $5.50 + 49% * $0 = $0.83.

 

This is really modeling a 50/50 odds on whether they liquidate immediately (they could structure in all sorts of way or sell part/all of company) or whether they try to push forward in hopes of a turnaround. The odds of that turnaround are slim-to-none and slim took off. I'll give you the benefit of the doubt and call it 2%. You are modeling the a scenario where it's 75% liquidation, 25% push forward. In the push forward situation, you have 60% odds of a complete turnaround to historical profitability (and to nit-pick, you are implicitly valuing an immediate turnaround which is less likely) and 40% odds of bankruptcy before you sell your position. So even in your unlikely situation, you should really discount back the bull-case to be conservative. As I see it, with Emerson you are paying as if the liscense renewal is guaranteed at higher rates. If they cannot renew their licensing agreement(s) in full and at current rates then the base-case IV falls considerably and make liquidation more likely. I agree with you that current mgmt sucks so liquidation will likely be 60% - 75% of net assets (since salary is likely the majority of mgmt's income). There is just so much risk here that I don't know if there is a price I'd buy at.

 

To invert. Maybe value investors should start to look to short over-priced stocks with large downside/little upside, in a failing industry, and one of the more inefficient operators in this terrible industry (lowest market share national distributor?). I have never shorted anything so borrowing costs would be a big issue unless you want to go with a put. I bring this up because there is literally nothing left to buy. I have been optimistic recently but there is only a handful of stocks I would buy at these levels. Let's hope TINA ends!!!

[Travis Wiedower]

I looked at MSN about a year ago. Others will disagree but some stocks are uninvestable at any price and this is one of them. If I don't trust those who control the company I'm out.

[HIPS]

The Hour Between the Dog and Wolf

 

The Hour Between the Dog and Wolf is originally a French saying (Entre chien et loup) which is multi-layered. It is used to describe a specific time of day, just before night, when the light is so dim you can't distinguish a dog from a wolf, however, it also expresses that limit between the familiar, the comfortable versus the unknown and the dangerous (or between the domestic and the wild). It is an uncertain threshold between hope and fear.

 

This is very much the feeling I have when I contemplate the latest developments at Emerson radio. As a quick summary refresher my Emerson Radio long thesis can be boiled down into the following salient points:

 

•  Ugly company, in an ugly situation and with very ugly corporate governance issues

•  Company has two US businesses: (i) low grade white goods distribution (micro waves & fridges), and; (ii) license / royalty business for the Emerson TV brand in the US

•  The white goods business is roughly cash flow breakeven whilst the royalty business generates between $7.5 and 8.7m of cash flow a year which on the market cap net of cash is a monster free cash flow yield

•  The controlling shareholder, Grande Holdings, has been in bankruptcy in Hong Kong since June 2011 and its owner has a history of bad acts both at Emerson and elsewhere. It has been working on an emergence from bankruptcy but has been rolling delays since June 2014

•  The company has contingent liabilities totalling $20.1m in the form of three pieces of unpaid US tax claimed by the IRS which the company is disputing. At least one of the IRS’ claims which is a liability of $4.8m seems to be a strong case for the IRS in my opinion

•  At the time of investment I had a low / high recovery of  $1.96 - $3.19 per share assuming no value for the US white goods business

•  I initiated a 5.0% my position on the 27th April 2015 at $1.35 per share

 

Since I added the position it has been a bit of a rollercoaster and I have put the link to a full update post on my blog below to save destroying the thread with a long post + attachments

 

https://hidinginplainsightblog.wordpress.com/2015/07/25/emerson-radio-msn-us-the-hour-between-the-dog-and-wolf/

[Guest Cameron]

Sold this today, they are buying back shares and have been for a couple months. It deserves a slight discount to cash for reasons already stated in the thread so I don't see the 30% gap closing between the near $2.00 in cash and its $1.53 stock price and even if it does I don't want to be along for the ride with the new management.

 

Was a screaming buy in January, not so much now.

[JayGatsby]

I agree with that assessment. I sold a month or so ago at 1.40. Thanks to whoever pointed it out (it was on the net-nets discussion a few months back). .