Trident Microsystems Inc. (NASDAQ:TRID)

March 31, 2009 · 14 Comments

We are adding Trident Microsystems to our ValueHuntr Portfolio. TRID is a company whose stock is trading substantially below its net-cash value. According to its latest SEC filing the company held nearly $212M in cash with $56M in total liabilities, for a net-cash value of $156M as of December 31, 2008.  However, TRID’s market price is only $95M, nearly a 60% discount to its net cash.

 

About

TRID is a leader in integrated circuits for Digital Television. While its products are used in all kinds of displays, LCD television is its most important growth market as LCD televisions take share from plasma in the market for larger screens as well as traditional CRT television sets of all sizes. Additionally, TRID designs, develops, and markets integrated circuits (ICs) and associated software for digital media applications, such as digital television (digital TV) and digital set-top boxes (STB). The company also designs cross-platform software that allows multimedia applications to run on devices in the digital living room, including digital STBs and digital TV sets.

 

Valuation

TRID is a net cash stock that always traded above its net asset value until this year. The company follows the typical case in Wall Street where analysts tend to emphasize earnings prospects and neglect the underlying value of assets. Once Wall Street realizes that positive earning prospects are no longer sustainable, the stock is sold off on the basis of poor earnings alone. This would never happen in the private market, where businesses tend to sale at a value equal to at least their net assets, plus a premium for earnings prospects for those which are profitable.

 trid_drop

 

 On its last earnings call, TRID reported net revenues of $19.2 million for the second quarter fiscal year 2009 representing a quarterly sequential decline of 45% compared with $34.8 million reported in the September 2008 quarter and a year-over-year decrease of 74% from the $75 million recorded in the same quarter of the prior year. Revenues from their top three customers represented 67% of total revenues in the second quarter. Revenues from the largest customer, headquartered in Japan, decreased by 63% from the prior quarter and represented 34% of total revenues. Amazingly, not a single analyst asked management about the company’s cash position and what their intentions are with this cash.

For the sake of conservatism, we value TRID based its cash at hand alone, assuming all other assets such as PPE and intangibles are worthless. Our analysis indicates TRID is currently trading at 60% below its net cash value, even all long-term assets are assumed to hold no value.

 trid_balance

Catalyst

Spencer Capital Management LLC, a New York-based investment partnership, announced on March 2, 2009 its intention to put forth a slate of candidates for election to the company’s board. We believe Spencer Capital will be able to realize some shareholder value in the near future. Spencer Capital is a New York-based fund advisor that specializes in deep value investing and is headed by Kenneth H. Shubin Stein, whose ascent to value investing has been nothing but ordinary.

In 2000 he founded Kenshu, LLC, the predecessor to the Spencer Capital Opportunity Fund, LP, which was formed in 2003. From 2001 to 2003 Dr. Shubin Stein managed Kenshu, LLC while also working as a portfolio manager for Promethean Investment Group, LLC. He joined Promethean after completing his internship in orthopedic medicine at Mount Sinai Medical Center in New York. Before his internship, he cofounded and managed Compo Asset Management, LLC, a U.S. based value investment partnership which was merged into Promethean. Prior to founding Compo, Dr. Shubin Stein was a medical technology analyst for The Abernathy Group in New York, an investment management firm specializing in the medical and technology sectors. Dr. Shubin Stein is a graduate of the Albert Einstein College of Medicine where he completed a 5-year medical and research program with a focus on molecular genetics. He graduated with a B.A. degree from Columbia College in 1991 with dual concentrations in Premedical Studies and Political Science. Dr. Shubin Stein holds the CFA designation and teaches an advanced investment research course to second year students at Columbia Business School.

In connection with their intended proxy solicitation, Spencer Capital Management, LLC and certain of its affiliates intend to file a proxy statement with the SEC to solicit TRID’s stockholders.

 

Conclusion

We have added TRID to the ValueHuntr Portfolio because it is trading significantly below its net-cash value, and we believe Spencer Capital, a fund that focuses on deep value investing, will be a catalyst to close this gap and thus increase shareholder value. With an estimated cash burn of $6-7 million per quarter, TRID’s net cash would stand at nearly $2.1/share at the end of 2009. We estimate the company is worth at least $2.54/share based on its cash alone compared to a current market price of $1.53/share.

 

Disclosure:  We do not have an actual holding in TRID. This is neither a recommendation to buy nor sell any securities]

Categories: Investing · Net Cash · Special Situations · Value Investing
Tagged: Kenneth Rubin Stein, Net Cash, Net Net, Spencer Capital, TRID, Trident Microsystems, Value Investing

14 responses so far ↓

  • Jae Jun // March 31, 2009 at 11:54 pm | Reply

    I know some folks that have bought TRID because they are really cheap.

    Nice write up. Looking forward to more and I hope we can exchange ideas and help each other out.

  • Jim // April 1, 2009 at 9:41 am | Reply

    I have a holding in TRID. There latest press release which was a few hours ago can be found here: http://sev.prnewswire.com/computer-electronics/20090331/AQ9205131032009-1.html

    A couple things in that press release are to be taken note of. 1:

    “In connection with the acquisition, Trident will issue 7.0 million common shares to Micronas, which are valued at approximately $11 million, based on the closing price of Trident common stock on Monday March 30, 2009. Trident will also issue warrants to Micronas to acquire up to 3.0 million additional Trident shares. One million warrants will vest on each of the second, third and fourth anniversaries of the closing of the acquisition, with exercise prices of $4.00 per share, $4.25 per share and $4.50 per share, respectively. If not yet exercised, the warrants will expire on the fifth anniversary of the closing of the acquisition. Upon closing, Micronas will own approximately 10 percent of Trident, without giving effect to the exercise of the warrants or any other dilutive securities.”

    This statement represents that Spencer Capital will ultimately fail in removing the board and not be successful in liquidating the company (if that was there intentions at all). This company must be valuated as a going concern now, not as a NET-NET. Although, the NET-NET proposition is now the icing on the cake so to speak.

    2:

    “With respect to the quarter ending March 31, 2009, and subject to Trident’s closing procedures, Trident expects to report net revenue of $6 to $7 million. Closing balances of cash and cash equivalents are expected to be approximately $200 million.”

    Last quarter there cash was $212 Million. TRID expects that number to be $200 Million in this quarter. Now whether they used that $12 Million for the acquisition is speculative.

    I purchased TRID because of several reasons. They’re a NET-NET, they had a catalysts in Spencer Capital, AND they looked good as a going concern. The only difference now is that they’ve lost a huge contract and the overall industry they’ve worked in has slowed dramatically. So, although as a going concern it’s still an enticing offer, the idea of reaping a quick return is highly doubtful. This has now turned into a long term play but even at that I believe its a 10 bagger.

    -Jim

    • ValueHuntr // April 1, 2009 at 10:01 am | Reply

      Thanks for the info Jim. Why doesn’t TRID make the purchases in cash intead of issuing shares? I still think TRID is cheap, even taking into account the dilutive effect.

      • Jim // April 1, 2009 at 11:25 am

        Good question. I can only speculate that if I were a company and could acquire a business today with leverage without diluting any physical cash, I’d do it. I rather dilute shares then dilute hard assets, especially when the market is under pricing those hard assets. It works out better for both parties in my opinion.

  • Sivaram Velauthapillai // April 1, 2009 at 12:47 pm | Reply

    Jim: ” I rather dilute shares then dilute hard assets, especially when the market is under pricing those hard assets. It works out better for both parties in my opinion.”

    I completely disagree. If the company is undervalued, based on its share price, you should not issue more shares. Doing so simply destroys shareholder wealth.

    Think about it this way. If you issue shares when the company is undervalued, you are basically giving away ownership to someone else at a low price. The owners of the issued shares will have a claim on the cash (or any other asset of the company). All the cash that you “save” essentially ends up being divided up by the new shareholders, who got the shares at a low price.

    (Now, if the cash is needed for some operations or for a huge takeover, they may not have a choice. Otherwise, issuing shares is the worst thing you can do if you believe the company is undervalued.)

    • Jim // April 2, 2009 at 3:49 pm | Reply

      I still disagree and here’s why. Leverage is good. This company doesn’t have much debt so taking on any leverage is not a bad proposition. Here’s some quick numbers. They reported that they will have $200 Million in cash. I have no idea what their liabilities will be so I’m leaving them at $56 Million where they currently are. Their outstanding shares are currently 62.86 Million.

      Dilution of shares:

      $200 Million in cash
      - $56.37 Million in TL
      = $143.63 Million
      / 62.86 million shares + 7 Million extra issued

      = Share Price of $2.06 per share in cash

      Dilution of hard assets

      $200 Million in cash
      - $11 Million (initial cost of acquiring the business, I believe this number would be higher if it was a cash deal)
      - $56.37 Million in TL
      = $132.63 Million
      / 62.86 million shares

      = $2.11 per share in cash

      So, you get a whopping 2.42% immediate advantage to purchasing the business with hard assets rather than shares. Not a big enough difference to make a difference in my opinion. Further more, with that little of difference, I’ll gladly pay for the hamburger next Tuesday in order to eat it today.

      • Sivaram Velauthapillai // April 3, 2009 at 8:56 pm

        Not trying to be stubborn ;) but I still disagree Jim. Your calculation ignores the future value of the company. If nothing ever changes and future earnings were zero then, yes, the difference is small (I didn’t check your numbers but probably the 2% you cite.)

        However, that’s the case with businesses that are going concerns. By giving away ownership, you give future potential profits. Your calculation is simply looking at present asset values whereas the shares are a claim on the lifetime earnings of the company. Paying in shares only helps shareholders if, as ValueHunter points out, management feels that the share price is overvalued and will fall.

        I have to look it up but you may want to check out one of Warren Buffett’s shareholder letters (any Buffett fan know which one?) where he says one of his greatest mistakes was paying for, I believe, Dairy Queen (?) in Berkshire Hathaway shares. The amount he paid for the company ended up being several hundread million in the end–far more than any cash amount he would have paid–because he gave away the profits earned by Berkshire.

        (Having said all that, if I was Micronas and viewed Trident favourably, I would ask for shares as well. Perhaps it would have been impossible to buy Micronas without paying in shares. The fact that they had to issue warrants sort of indicates that Trident has on the losing end of the negotiating table. Who knows; but paying in shares is a bad move in general.)

    • Jim // April 4, 2009 at 2:10 pm

      Sivaram, you make a valid argument and one I initially can’t argue against.

  • Jim // April 2, 2009 at 4:04 pm | Reply

    When speaking on diluting shares rather than hard assets, I’m only applying that logic to this circumstance. Every circumstance as you know is different and in this particular one, I’d choose diluting the shares. I want to make it absolutely clear that no two businesses should be evaluated the same. That would be a huge error.

    • Jim // April 2, 2009 at 5:18 pm

      Another point to ponder I believe is this.

      “Trident will also issue warrants to Micronas to acquire up to 3.0 million additional Trident shares. One million warrants will vest on each of the second, third and fourth anniversaries of the closing of the acquisition, with exercise prices of $4.00 per share, $4.25 per share and $4.50 per share, respectively.”

      I think this paragraph describes the due diligence taken into account by both parties of the acquisition. Obviously Micronas Semiconductor isn’t going to give away $35 Million in revenue for $11 Million is stock. What would they have to gain by dong so? They’ve obviously valuated the business at least $4.00 per share. That would give them something to gain if it hit that target in the near future. So, TRID is getting $35 Million of leverage and it is only costing them $11 Million to do so and Micronas is taking a huge discount to their worth initially because they have a strong feeling that their newly acquired stock is worth at least $4.00 per share. What does this do for the shareholder who bought in at $1.30 per share? Puts a hell of a big smile on my face :)

  • ValueHuntr // April 1, 2009 at 1:21 pm | Reply

    Yeah I actually agree with Sivaram. I don’t think management would want to be diluting shares at this level. Why is management holding such a big cash reserve is they are no using it to even purchase businesses?
    The only thing that comes to mind is that management must think that share value will be droping, and hence they will be paying a lower value in the future in dollar terms.

  • JM // April 1, 2009 at 4:33 pm | Reply

    Its April Fool’s Day over at Trident…its been April Fool”s Day for a few years now…

    • Jim // April 2, 2009 at 3:57 pm | Reply

      Well, if it is, I hope they keep on doing it because I’m up a little over 45% in it so far.

      • Jim // April 2, 2009 at 4:00 pm

        Woops, I meant 17% LOL. I’m up over 45% in a completely different stock I was looking at the same time :) 17% is good though :)

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