Thursday, March 16, 2017

STRI at 22% of Cash

Here is a simple one.  STR Holdings (STRI) is a solar panel encapsulant manufacturer currently selling for 22% of cash, 11% of BV, and 34% of the cash left after paying off all liabilities.  It's a classic net-net.   The stock has been in a death spiral but the chart shows it has found support around $0.15 over the past year.

That's it. Cheap numbers, all time low, chart support. Potential upside vs downside.

The problem is cash burn with a negative operating margin and decreasing revenue.  If you're into quality businesses with a moat this is not for you. If you believe turnarounds don't turn move on.

I found this stock at DeepValueIdeas in Oct 2015.  Good write up with some history on how we got here.  Recently cigarrfimpar wrote a blog post as well.  I suggest you start with these and I'll just add a little on top.

Stats:
  • fully reporting
  • share price: $0.18
  • market cap: $3.5M
  • shares common: 19.2M
  • no preferred or warrants
  • all assets and liabilities are current
  • cash: $12.4M + $3.4M bank notes
  • liabilities: $5.5M
  • BV: $31.4M
  • rev: $20M
Charts:


The Good:
Stock is trading at: P/Cash = 0.22, P/NNWC = 0.34, P/BV = 0.11, P/S = 0.18.  The chart shows we are at a low support level with almost a year long base.  

The company is in the process to sell their Malaysia facility which should fetch about $6M cash.  The Purchase and Sale Agreement has been signed by both seller and buyer as of Nov 18, 2016 and is now awaiting approval by the Johor Port Authority.  

In Dec 2014 Zhenfa bought 51% of the company for $21.7M so it was not too long ago that someone thought this company was worth 12x the current market cap.

The upside is big if they can stabilize or liquidate.

The Bad:
Negative operating margin.  Sales have been cut in half from two years ago.  Annual operating loss of around $13M the past couple years.  

This quote from the most recent 10k: "We face intense competition in the solar encapsulant market and have experienced a significant decline in our global market share from approximately 30% in 2010 to 2% in 2016."

The Future:
The multiples make this stock look super cheap while the cash burn points to a company going out of business.  Will they be able to stabilize?  Will they shut down?  

The company is trying to survive.  Costs are being cut.  The Malaysia facility was closed in 2015.  Right now they are shutting down China and expect to "wind down substantially by the end of the first quarter of 2017".  They "plan to launch commercial-scale production of our products within India during the second quarter of 2017."

A couple quotes from the most recent 10k:
Over the past several years, many of our Western customers continued to lose market share to lower-cost Chinese module manufacturers, with many being forced into bankruptcy or exiting the solar business as module production migrated rapidly to Asia, primarily China. We have been actively trying to enhance our presence and improve our competitiveness in China, however, in light of the obstacles detailed herein relating to the Chinese market, we have decided to conduct an orderly wind down of our China-based manufacturing operations. Given that our China factory has been manufacturing encapsulants for sale outside of China, we are currently working to accommodate production in the primary export market, namely India.
Our customers in India have generally paid according to terms. Although pricing in India is also very aggressive, we believe that the India market represents opportunity of sufficient scale to support profitable production operations within India, though we cannot assure that this will be the case. We have been working for several months to qualify a tolling partner in India and plan to launch commercial-scale production of our products within India during the second quarter of 2017.
As with any turnaround situation I look first at the balance sheet and ask myself do they have the pieces necessary to survive?  STRI checks off a lot of boxes: no long term debt, available cash, old assets to sell.  Problem is they also check off some negatives: revenue falling, high cash burn.  I'd say they have a couple years to figure it out

-- Dan 
disclosure: long STRI

6 comments:

  1. Have they ever been positive gross margin? Why should this business continue to exist if they are negative GM?

    ReplyDelete
    Replies
    1. Yes this company has had a positive gross margin but it's been a few years. If they are not able to get back to a positive gross margin they will probably shut down operations.

      With the current balance sheet investors would make about a 3x return if the doors were closed today.

      Back in 2011 the stock peaked around $80. It's currently $0.17. Two and a half years ago it was at $4. So there's your upside. Downside is it goes to 0.

      Delete
  2. Replies
    1. Thank you. I wish I had time to write more.

      Delete
  3. Hey, Dan!
    Great discovery and writeup!

    What do you think about CEO having $0.5 million salary? seems like too much for a sinking ship. And it's growing.

    His entire stock position would be worth only one annual salary at P/B = 1. It seems, that his incentives could be to run the company as long as it's possible.

    What are your thoughts on this?

    ReplyDelete
    Replies
    1. I'd say that salary is too high and yes he may just run the company into the ground. You have pointed out one of the risks here. This stock is a race against time. Can they get something done before the money runs out?

      Delete