Thursday, December 28, 2023

SPRS is Consistent, Profitable, and Cheap

Surge Components (SPRS) is a rarety amongst my portfolio: well run and profitable.  The stock sits at $2.40 giving a market cap of $13.7m.  They have $10m in cash + securities, $40m TTM revenue, $2m TTM net income.   

The board owns over half the company and acts intelligently.  They build up cash and do the right things.  In 2017 they spent most of their cash buying back half the common in a tender at $1.43.  Since then they've built it back up from $1.5m to $10m.  

No drama with this one and no shady management.  Even I stumble onto quality once in a while.  

This story is a simple one: quality stock trading too cheap.  Every time I look at this one I feel like I must be missing something because it just looks too good.  I think the issue is it's a commodity business.  From the most recent 10k
We are a supplier of electronic products and components. These products include capacitors, which are electrical energy storage devices, and discrete components, such as semiconductor rectifiers, transistors and diodes, which are single function low power semiconductor products that are packaged alone as compared to integrated circuits such as microprocessors. The products that we sell are typically utilized in the electronic circuitry of diverse products, including, but not limited to, automobiles, telecomm, audio, cellular telephones, computers, consumer electronics, garage door openers, household appliances, power supplies and security equipment. The products that we sell are sold to both original equipment manufacturers, commonly referred to as OEMs, who incorporate them into their products, and to distributors of the lines of products we sell, who resell these products within their customer base.

I don't know anything about the small electronics parts supply business.  Maybe there are cycles.  Maybe we'll hit a downturn.  

But look at this performance (thank you rioc.ai):


They've had really good numbers since covid as orders went through the roof.  SPRS was able to deliver product during the supply chain issues.  The stock is down recently since the numbers have cooled off and the company expects it will take some time to get their mojo back.  

Some quotes from the most recent presidents letter and annual meeting (thanks tikr.com): 

I am happy to let you know that I made my first trip to Asia in August, to visit both customers and suppliers after four years, due to the pandemic. The meetings were positive with excellent opportunities for growth.
At the end of 2022 these customers ended the year with major excess inventory, which we believe will take four to six quarters for them to consume, before starting to order these products again. At the same time, the Company has achieved new business with both new and existing customers and continues to forge stronger and closer relationships with our customers. Surge is a major supplier for many customers, and we continue to broaden our global reach through our regional sales operations and our distribution channels. In Europe, we are successfully penetrating the market, utilizing our sales office in London. Concurrently, we are also growing our presence in Asia as we have employed a key sales manager in China. We plan to continue to hire additional sales talent in both Europe and Asia.

the company sees that it will probably take another 5 or 6 quarters, from what we could see at this moment, until customers have consumed that excess inventory and are ready to start ordering those same products again

cautiously optimistic about a gradual improvement throughout 2024 to rebound to the sales before '23 level
Steven and I, the executive management of the company, are cautiously optimistic that certainly by the end of 2024, we are looking forward to seeing a gradual improvement and that the sales will grow because the customers will start buying products again

Here's a 10 year chart.  You can see the tender at $1.43 in 2017 and the great numbers since covid.  It dropped down as low as $1.52 yesterday for some reason.  


Numbers as of the most recent Q:

  • 5.7m shares common
  • 10000 shares preferred
    • dividend $0.50 per share annually
    • non-voting
    • liquidation pref $50k
    • convertible to 10 shares common each
  • $1.79 cash + securities per share
  • $3.33 book value per share
  • TTM rev $7.14 per share
    • $1.60 most recent Q
  • TTM EPS $0.36
    • $0.02 most recent Q
I don't understand the preferred since it looks like the most tame preferred out there.  It was issued in Nov 2000.  Since it's non-voting with such a small liquidation preference and annual cost it doesn't impact much.  

This stock is selling below book with 2/3rds of the market cap in cash + securities.  Even if you annualize the most recent Q with lower sales the stock is at 0.4 times sales.  The balance sheet is solid with only a lease as long term debt.  That is too cheap.

Even with sales down 36% in the most recent Q they remained profitable.  To me it's just a well run, quality company to hold on the cheap.  Ira Levy and Steven Lubman have run the company since inception in 1981.  They own 18.4% and 19.9% of the common, respectively, and are 67/68 years old.  I hope they keep going for a couple more decades.  



--Dan
disclosure: long SPRS



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13 comments:

  1. One thing that concerns me is why they keep changing their corporate domicile back to Nevada. Whether there is a particular reason or it’s bc they are aware that Nevasa provides the management with a better fraud protection. Are you aware of any reason why they keep changing it back to nevada?

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    1. Someone emailed me some negative stuff about management yesterday after seeing my post. Turns out there was a proxy battle in 2016 and that's what led to the tender at $1.43. I didn't know about that as I heard of this stock after the tender. Part of the proxy was reincorporating to DE. Once the terms expired they reincorporated back to NV which I can only take as a sign they want to enrich themselves somehow

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  2. Wow, two posts in less than a week, you trying to set this on fire as well? Does this company have any similarity to EACO?

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    Replies
    1. not sure, I don't know much about EACO. Your mention reminds me someone mentioned that one to me in like 2017 and looking at the chart now I'm kicking myself

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  3. Its probably a better time to sell this than buy it

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  4. Hey Dan, it appears the dividend is only for preferred shares

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  5. Using a share count of 5.77mm I get TB of $3.25 and NCAV of $2.91. It looks like the 5-yr average multiple to TB has been 1.3Xs, which seems reasonable given the seeming quality of the balance sheet and profitability. Currently, 1.3xs would be $4.23, so I may put in a limit buy at $2.12 and try to double from mean reversion (assuming TB stays constant). If TB keeps growing that's a bonus. Thanks for highlighting Dan. -V

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  6. Hey Dan, seems that this deviates from your typical MO in that it is not beaten down, has not built a base, and is not close to all time lows. Is this a change in your approach that we should see more of going forward, or a one-off? Any explanation? 🙂

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    Replies
    1. Well I first bought in late 2017 I think around $0.65 so at that point it was all those things. I've held and added over the years, just never got around to writing it up until now.

      At this point it's still cheap. Still small and lonely and low liquidity but for sure the chart is different

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    2. I didn't make it a large position back then since the biz is not exciting and seems like a commodity. Every time I look at it I feel like I'm missing something so I've never gone in heavy but it's a good business

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  7. Maybe It is cheap because of this:

    "Most products sold by Surge are manufactured in Asia, including such countries as Taiwan, South Korea, Hong Kong, India, Japan and China.
    The purchase of goods manufactured in foreign countries is subject to a number of risks, including economic disruptions, transportation delays and
    interruptions, foreign exchange rate fluctuations, impositions of tariffs and import and export controls, and changes in governmental policies, any of
    which could have a material adverse effect on our business and results of operations. Potential concerns may include drastic devaluation of currencies,
    loss of supplies and increased competition within the region."


    "Surge and Challenge obtain a significant amount of their products from manufacturers in Asia. Of the total goods purchased by Surge and
    Challenge in Fiscal 2022, those foreign manufactured products were supplied from manufacturers in Taiwan (42%), Hong Kong (13%), elsewhere in Asia (37%) and overseas outside of Asia (less than 1%). The Company purchases the balance of its products from the United States. The Company
    purchases its products from approximately sixteen different manufacturers"

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