MPAD - Micropac Industries, Inc.

[orion]

Due to a confluence of factors, including a lack of analyst coverage and institutional awareness, and a really small market capitalization, we believe Micropac Industries, Inc. (Ticker: MPAD) offers a rare opportunity to purchase an under the radar, niche business with a long history of profitability, and strong FCF generation abilities, at liquidating value.

 

From their business description:

 

Micropac Industries, Inc. (the “Company”), a Delaware corporation, manufactures and distributes various types of hybrid microelectronic circuits, solid state relays, power operational amplifiers, and optoelectronic components and assemblies.  The Company’s products are used as components in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200o C) products.  The Company’s products are either custom (being application specific circuits designed and manufactured to meet the particular requirements of a single customer) or standard, proprietary components such as catalog items.

 

Valuation:

 

Doing a quick back-of-the-envelope calculation we came up with a liquidating value of about 13-13.5M. Which roughly equals the current MarketCap of 13M. The largest assets on the balance sheet are cash and short-term investments (~10.2M).

 

So, just looking at those numbers, one has to conclude that Mircopac is losing money hands over fist - but this is not the case. Net of cash, the company currently trades for 2x earnings.

Micropac not only achieved to remain profitable during the “first” financial crisis but also managed to post strong FCF numbers.

 

 

 

 

                        2006-11          2007-11          2008-11          2009-11          2010-11

 

Revenue          17,156            18,524            20,060            17,571            23,070

Net Income      1,419              1,619              1,918              817                  2,696

 

 

Total cash        4,583                6,415            6,522              7,802              10,085

 

Dividend paid  (387)                (258)              (258)               (258)               (258)

 

 

Free cash flow  721                  2,083            356                  1,538              2,534

 

Source: Morningstar

 

In each of the last several years, Mircopac payed a small dividend and managed to increase its cash level on the balance sheet.

 

Risk:

 

- Although it seems that they have successfully survived in a niche market (since 1963) we don´t really have an understanding of Micropac´s market and how it will develop in the near future.

- Small shareholder base. The largest shareholder (Heinz-Werner Hempel, Age 82) owns 75.7% of the outstanding shares. So, the free-float is really(!) small.

- From their latest 10-Q: “The current economic downturn and government funding is resulting in delayed or cancelled satellite programs resulting in lower sales and new orders for space level solid state power controllers.”

 

Consclusion:

 

Micropac is trading at liquidating value, has almost no debt, a huge cash position (~70% of liquidating value), and is generating a large amount of FCF. Even though no near term catalyst is in sight, the current valuation is way too cheap.

 

Corporate presentation: http://www.micropac.com/pdf/Micropac_Overview_050108.pdf

 

Any opinions? Does anyone know of something we haven´t considered?

[beerbaron]

It reminds me of a telco that has most of it's business tied to government expenses. CMTL dirt cheap too if you discount the cash on the balance sheet.

 

BeerBaron

[oddballstocks]

I wrote about them on my blog back in March: http://oddballstocks.blogspot.com/2011/03/micropac-industries.html

 

So from what I remember a few possible downside risks:

-Extremely illiquid, it went from $6 and change to around $10 over a few days on something like 20k shares

-The company has a very limited customer base, three to four main customers, and 75% of their revenue comes from the government.

-The whole sector is in the dumps (not a terrible thing), but there is some overcapacity problems.

 

I've followed them off and on, yes the company is cheap, great downside on an asset basis.  The question I have is how bad will the military cuts be for Micropac?  The company is conservatively run, but there is always a risk that management will blow the cash on some bad acquisition.  As far as I can tell there isn't a catalyst on the horizon, which isn't a terrible thing it might just be a long wait for value to be realized.

 

The other aspect is once value is realized it might be impossible to get out quickly.  The shares don't trade often, I had a GTC bid out there for weeks if not months and it never hit.  I knew another investor who had an outstanding bid for almost 6 months without a hit.  My bid was above the last trade as well, same with the other investor, just very illiquid.  I guess I'm just trying to say don't hope for some sort of flip, you might be in for years.

 

If you like Micropac I'd consider checking out Solitron Devices, same industry but a more diversified customer base with a pending catalyst as well.  I've written up Solitron as well:

 

http://oddballstocks.blogspot.com/2011/05/introducing-solitron-devices.html

http://oddballstocks.blogspot.com/2011/06/solitron-assets-and-liabilities.html

http://oddballstocks.blogspot.com/2011/06/solitron-wrapping-things-up.html

 

I hate to just post links, and I'm not trying to pump the blog, it's just that I have a lot of content written up already and it's easier to link than rehash what I've already written.  If you have any questions on either company feel free to shoot me an email.

[Green King]

Are possibility of this company selling its products to the growing private space industry or developing nations like China or India ?

 

[orion]

@ oddballstocks. Very interesting blog post. Thanks.

 

Today MPAC is down almost 8% on no news. We have been able to add a little to our position.