Thursday, April 8, 2021

PGNT for You and Me

I did most of my PGNT buying a year ago and with the stock up over 200% I'm still adding.  This one may keep going so let's take a look.  

It's been a while since we played our favorite game, Price That Stock!  Here we go.  No looking at the stock price before playing.  Humor me

We'll play a few rounds.  What do you think it's worth?  First the standard NoName stats:

  • revenue $108M in 2020 vs 112.9 in 2019 vs 85.1 in 2018
  • shares common 1.7M vs 1.7 vs 1.7
    • no preferred or warrants
  • book value $11.8M vs 8.2 vs 6.6
  • net income $3.12M vs 0.99 vs 0.95 after taking out loan forgiveness
    • EPS $1.84 vs 0.58 vs 0.56
Clearly 2020 has been a breakout year so your value will of course depend on how repeatable you think that is.  But no cheating!  Just on those numbers I'd go with a stock price of maybe $10 or more

Now for round 2 let's expand our annuals back a few years
Pretty nice growth.  Looks like there was some acquisition a few years ago.  I'll stick with >= $10 for the stock.  One impressive number is the share count through all that.  

And for round 3 we look closer at the recent quarterly numbers.  

Wow is all I can say.  The big earnings jump in 2020 was not a one off single quarter.  It built up all year and has just exploded in Q4.  Seems Covid was good to them.  At this point with such a rise my thinking moves from a dollar stock value to a range of upside versus downside.  My brain races to the possibilities: what if this is the new normal?  If the company goes back to 2019/2018 type numbers maybe the stock is worth $5-10.  But if $0.93 per quarter continues then this stock will be over $30.  What if it keeps growing?  

According to the market the answer is $6.45.  Seems low to me.  The stock has only risen ~$1 since the annual came out last week showing that amazing Q4 which surprises me.  

Paragon Technologies is a holding company run by Warren Buffett fan Sham Gad.  He used to have a value stocks blog.  He wrote a Buffett stock book.  He fancies himself a rational capital allocator.  The company has 4 business segments: 





I don't have much commentary on the businesses.  Some of the recent growth was investments working out.  They owned some ACY for example which spiked up about 10x in Dec so maybe they captured some of that.  Most of that growth is from the company's 2016 acquisition of South American IT products distributor SED International de Colombia for $1.4M cash.  That's the big revenue jump you see above in the annual numbers and it's crazy to think they got it for that price.

But the share count, that I do have comments on.  It is beautiful to see.  When Sham took over in 2014 there were 1.605M shares outstanding.  In 7 years Sham has increased revenue by 100M while adding 100k shares.  This is how you do it. In fact PGNT went as far as amending the Company's certificate of incorporation to decrease the number of authorized shares of common stock from 20,000,000 to 4,000,000. in 2019!  You don't see that very often.  

On the subject of Sham Gad let me mention some good and some bad.  On the good side he owns a third of the common and is still buying (100k more shares in 2020).  But he has a checkered past.  He had a theft charge in 2004 from a company he worked at.  This company dug up some dirt on false statements made by Gad to convince shareholders not to vote him onto the board.  Gad is the biggest risk in this story.

Overall my feeling is the numbers don't lie and those numbers look kinda like a snowball rolling down a hill to me.  Long term it's a bet on the CEO Mr. Gad which you may or may not want to take, but man is it cheap.  


--Dan

disclosure: long PGNT

64 comments:

  1. "...and with the stock up over 200% I'm still adding". Interesting. I would rather not buy more because it has gone up so much. I prefer stocks which are still in the dog house.
    but the stock is small, cheap and has a strong "momentum". A nice combination.

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    1. I agree but it's cheap. Most of my buying was a year ago at $2. I prepared notes for a blog post and was still buying when the stock starting moving so I just froze and did nothing. Later in the year as the CEO kept making big share purchases I bought some more. And I've been buying more since the latest annual came out showing that great Q4.

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  2. Hey Dan, you are right, earnings really have been great on this one. Just one thing really holding me back has been where those cash flows have gone: currently looks like Las Vegas Real estate. Remains to be seen if this is just an astute investor making bargain purchases or something like empire building. Fingers crossed for the former, and good luck to all. Keep up the good work Dan!

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  3. Which statements in the Rubicon letter are false?

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    1. sorry that worded strangely so I've rewritten that sentence. I meant the false statements made by Gad

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  4. It appears the three properties presently owned by Ohana are at Waldorf Astoria:

    - https://maps.clarkcountynv.gov/assessor/AssessorParcelDetail/parceldetail.aspx?hdnParcel=16220712030&hdnInstance=pcl7
    - https://maps.clarkcountynv.gov/assessor/AssessorParcelDetail/parceldetail.aspx?hdnParcel=16220712098&hdnInstance=pcl7
    - https://maps.clarkcountynv.gov/assessor/AssessorParcelDetail/parceldetail.aspx?hdnParcel=16220712118&hdnInstance=pcl7

    Gad is the treasurer of the HOA: https://opencorporates.com/officers/154625524

    Given his history of self-dealing and the fact that SI recently leased an office in Las Vegas, what are the odds he occupies one of the Ohana properties?

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    1. what is his "history of self-dealing"? Do you mean the $4k he stole from the store he worked at in 2004 that I linked https://www.onlineathens.com/local-news/2012-01-15/old-theft-charge-could-lead-longtime-athenians-deportation, or is there more?

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    2. btw here's a podcast Sham Gad recorded with Bobby Kraft in Sept 2020. Gad recorded it at one of their Vegas buildings and said he was there on a business trip. https://planetmicrocap.podbean.com/2020/09/

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    3. Yes, I'm referring to his theft of funds that were intended to go to charity.

      Another question - when did he graduate from Stanford? The Paragon says he attended the Graduate School of Business Executive Program: https://pgntgroup.com/management-team but as recently as last year there was no mention of the same credential: https://web.archive.org/web/20200131110805/http://pgntgroup.com/executive-management/executive-officers/

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    4. It might be a shorter several month long credential type thing.

      This standard page lists someone of his name on a project team in 2019. https://www.gsb.stanford.edu/alumni/volunteering/act/projects/stanford-university-voice-initiative

      This 2014 Paragon press release mentions John Molloy completed "a three month Executive Management program at Stanford University." https://www.prnewswire.com/news-releases/paragon-technologies-announces-key-executive-changes-263063931.html

      Maybe Gad did the same management program Molloy did. You could contact PGNT and ask

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    5. The decision to invest in Las Vegas real estate is a valid concern. It does appear to be roughly cash flow neutral (67k loss in operating income, which should include depreciation on a rental property), so at least it shouldn't hurt the core business. I guess I would rather see them invest in an easy to manage investment than try to do something crazy, but they are probably banking much more on price appreciation than cash flow.

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  5. realized I forgot to mention one of my favorite things which is PGNT reduced the number of authorized shares from 20M down to 4M in 2019 so I've added a line about that

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  6. Nice numbers.Cheap company and fantastic risk-reward opportunity.
    Like very much all your ideas.
    Thanks for sharing.

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    1. You're welcome. Thanks for reading and commenting back to me

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  7. I haven't dug into their recent filing, but I also purchased a while back in the 2s. Forgot about it to some degree and bought a little more this year around $5. Haven't been patient enough to get as large of a position as I'd like. I have found myself wondering what it will take to get a normal P/E on this stock....get smallish spikes on good news, but certainly seems like it should be higher than it is at this point.

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    1. I agree it's weird for the stock price to be so low. They are fully filing and have been for a long time so it's not a lack of info. I guess the market doesn't trust them. Whatever, I'll take it and wait for something to happen

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  8. Thanks for the write up! Nice to have this new one on my radar.

    Any thoughts on 2021 outlook for the Automation biz? Q1 numbers were significantly down, and Sham mentions in the shareholder letter that bookings were $4M to start the year, down from $7M in 2020. Certainly COVID was good to SI Systems - just wondering how good.

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    1. not many thoughts on my part. Just watching and waiting. we'll see what the next Q says

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  9. Hey all:

    PGNT is down a bit...there is a problem with Colombia. CV-19 is running rampant, and there is also a tremendous amount of social unrest and rioting. That can't be good for their distribution business.

    I think the question becomes just how bad the situation is in Colombia. Does it last 1-2 quarters, OR 1-2 years? OR is it permanently impaired? I tend to think that it lasts a couple of quarters until the vaccination rates get a lot higher.

    I also wonder about the Vegas properties. I was skeptical on the 1st purchase, but that has worked out well. The new purchases seem to have good financing behind them...but it is at the peak of a cycle? Sham addressed that in the latest quarterly conference call by admitting that property prices are indeed high, BUT that they got good financing AND that the market is very thin on the types/class of property that they are getting. Supply of that class of property is limited, so maybe they have some downside protection?

    Finally, if PGNT prints a bad/weak quarter, might the stock go down substantially? Assuming it is a temporary problem, could be a buying opportunity?

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  10. Any idea what the false statements to the government agency were? Are they related to Sham's first conviction? I like him and think he was just a stupid kid back then seems like he is legitimately sorry.

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    1. I don't know. they're mentioned here a bit: https://www.businesswire.com/news/home/20160526006535/en/Rubicon-Technology-Sends-Letter-Stockholders

      nice Q that just came out. the stock is cheap

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  11. A lot of very good reports came out lately for low float stocks and stocks crushed. The market is weak. Although S&P at around all time high

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  12. I'm going to trust Sham if he's really out to enrich himself at the expense of shareholders. Then he certainly has a strange way of doing it especially given PGNT's strong preformance and investor friendly policies.

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  13. Arent margins too low? Hardly any free cash flow. What is the catalyst here?

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    1. I don't see a catalyst.

      as for margins what do you mean? too low for what?

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    2. The Catalyst will be an uplifting to the NYSE-AMERICAN they mentioned it in the last annual call.

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  14. Actually, I think the margins are high...very high.

    The vast majority of their revenue comes from computer hardware distribution. Distributors are low margin. Some distributors are LUCKY/GOOD to get a 1% net margin on their sales.

    PGNT is selling/distributing into a small and sheltered market, so perhaps they can earn much higher margins than what a distributor can in the USA.

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  15. Another solid quarter. I doubt it moves the price, since it is consistent with recent quarters. At some point you would think it would get a normal multiple...

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    1. yep great quarter again. Earned $0.52 on the quarter and none of that is PPP stuff or anything. TTM EPS of $1.90 and BV of $7.59 for a $6 stock. talk about cheap

      company has been doing great. Next Q has seasonally been there best and last year earned almost a dollar on that quarter alone.

      The stock should be much higher. back to waiting

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  16. Paragon technologies maybe is down because of his name. The last days "technologies" is a bad name if you have a company in the stock market.

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  17. The earnings report seems to be delayed and they fired the cfo and brought back deb something seems amiss

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    1. none of that is true

      why do you think earnings is delayed? they always file the annual end of March which is still a few weeks away

      and where did you hear the CFO was fired or debt was brought on?

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    2. or did you mean Deborah? sorry I thought your lower case deb was meant to be debt

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    3. with the recent drop I have been wondering if we have bad news on the way. we should know within a month

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    4. Wonder if it has anything to do with the filing about RBCN: https://www.otcmarkets.com/filing/html?id=15599867&guid=nOHwkn4eJq52B3h

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  18. The RBCN filing is interesting. I was also worried about bad news coming, but if there were issues would they be pursuing this with RBCN?

    I'm not sure what to think of the CFO only lasting a couple of months. Could be anything...very bad or completely insignificant. I will be interested in seeing Q4, I can't see any reason why it would be bad. Exchange rates have been favorable in the last couple of weeks. I think it is driven more by the automation business, so backlog will probably be key. Distribution is relatively low margin.

    With the price action in real estate over the last couple of years, you would think they have some pretty significant equity in their properties already as well. I bought more when it fell down to the low 5s, but have a full position at this point.

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    1. I take the RBCN news as positive for PGNT. I think it means they have excess capital to employ which likely means the next report will be good, inline with previous Qs.

      I think the PGNT offer for RBCN is too low to really work but it would be great if it did. I take it to mean PGNT is in good shape

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  19. Agreed, I can't see them accepting less than the stock was trading at a few months ago. Maybe in the 11-12 range...but even then, their main complaint is that insiders are getting all the benefits at the expense of other shareholders. I think it would take a significant premium to get them to give that up. Maybe they can get support from the other large shareholders.

    I think the better question is if they don't get this to go through, do they purchase the identified target company on their own? Or does it only work with the NOLs? I guess it may also be too big for PGNT to do on their own as well...

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  20. Earnings look pretty solid with $1 EPS in Q4 alone. If you adjust for PPP from prior year, employee retention credit this year and ignore unrealized gain/loss on securities, it is pretty solid growth.

    Unfortunately, I doubt this moves it much. Pretty consistent for the last couple of years..

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    1. Yep another good Q. One bad part was the foreign currency adjustment but still super cheap. Interesting to see Gad get no bonus for 2021 which gives me some hope it's tied to stock performance

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  21. I mostly ignore the fx adjustment, but I agree it does have an impact on the stock. Do you have any viewpoint on that going forward? I see the peso has strengthened since the end of the year, but the long term chart doesn't look great...

    I would have thought that it was primarily driven by politics, but it has continued to weaken after a short correction at the end of 2020.

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    1. just makes me wonder how much of the cash is usable in the US versus sitting with subsidiary in Colombia.

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  22. That is a valid concern, I don't see a breakout of that at all. I know I have seen corporate charge management fees, etc to bring back some of these funds, but I didn't see them disclose anything like that. I'm also not sure what the cost is to bring money back from Columbia.

    It should be noted that the FX translation adjustment is on the entire balance sheet, so it could be minimal cash sitting there. I do see they have lines of credit with balances in the foreign subs, so I would assume they don't have a lot sitting there.

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  23. https://pgntgroup.com/events%2Fpresentations
    18th May annual metting audio file. Very transparent and optimistic.
    Hope fantastic years to come for the company.

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    1. Seems the video isn't posted there anymore anyone know where I can find it? Any ideas why they took it down?

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    2. You can email me, I have it saved. I don't know why they took it down

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  24. I haven't gone through the 10Q report in detail, but on the surface it seems like a disappointing quarter. Rev was down over the previous 3 quarters and is about the same as the period a year ago. EPS was only 0.22, which is lower than any of the previous 4 quarters. Does anyone have any thoughts?

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  25. A disproportionate amount of net income is related to the automation business. That is where the revenue is down most. I know I have read in the past that the revenue can be lumpy based on timing of projects for customers. I believe they only provide backlog data in their annual filings....at this point, I think I'd need to see another quarter or two before having a strong opinion on whether it was just timing of sales or a larger issue with declining business conditions.

    On the distribution side, I'm sure they are seeing some margin pressure with higher fuel/shipping costs, increased interest rates and the weaker peso, but nothing too major at this point. I would say the earnings were disappointing based on how much they have beaten expectations the past year plus, but not too bad when you factor in the few items that were definitely working against them this quarter.

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  26. Any concern with the change in government in Colombia? There are some who think Colombia will go the way of Venezuela with the new ex-terrorist very left leader.

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    1. that is not something I've given any thought to

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  27. another great Q. $1.05 quarterly EPS. $9.82 book value. $3.90 in cash + securities.

    TTM earnings per share of $2.87

    Stock has fallen to $6.50 for I don't know what reason.

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  28. Maybe the stock has fallen because of political issues in Colombia. Good results, hoping the stock follows results. Also waiting results for EKCS, lets see...

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  29. God I wish they'd just buy back some of the float. A relatively small amount of money here would go a long way.

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  30. Has sham spoke at all on potential of uplisting?

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    1. Yes I feel like someone asked him about it at the last annual meeting. I don't recall specifically but I think he downplayed the chances, just saying that's not really where he wants to spend money and effort.

      Sham wants to be Buffett. He releases numbers on Friday night, he has a super basic website and never puts out press releases. I feel like he saw BRK stock do amazing even though Buffett never did a split and he wants PGNT to do similarly well without any promotion. That is my guess. I don't think he's going to uplist

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    2. Agree with avoiding stock promotion. Focus on creating value has worked so far
      How reputable is their accounting? You have more experience with this part of the market — what do you need to look out for with pink sheet stocks? Trying to go through all the scenarios where there could be outright fraud
      Obviously the skin in the game and capital allocation decisions from management makes me more optimistic than 95% of NYSE stocks. Unbelievable risk/reward, potential for long term compounding and multiple expansion. Need some more trust with my understanding of reporting standards before I concentrate further

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    3. I'm no accountant. Seems fine to me. What I look at is how does the company talk and what does the balance sheet look like. Do they keep diluting constantly. Do they always talk about the next thing and never finish the first. Does the CEO have side businesses that he funnels money through back to himself

      I also do not concentrate because I feel like anything can happen

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  31. Any comments on CVV's rise?

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    1. New silicon carbide stuff is exciting and growing. I hope it keeps going and numbers back up the potential

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  32. another great Q reported yesterday from PGNT in the 10k. The stock is cheap

    on the year PGNT earned $2.76 per share. Book value rose 23% to $10.60 per share. $3.12 in cash. And here the stock has been sitting at 7 for months. 2x earnings and 70% of book. great balance sheet

    3x the average earnings over the past three years. ridiculous

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  33. Fantastic results! Smallcaps are being punished, we have to be patient.

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  34. Not sure why they are paying down accounts payable so fast unless customers in colombia are demanding payments earlier. Not a huge deal though

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  35. Not great number from PGNT, although still profitable on an operating basis. Receivables remain high and operating cash flow has been negative. I worry this is related to problems in Colombia.

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