In our last post, we took a look at companies that were trading at a market cap below cash on the balance sheet. Usually, stocks that fit this criteria face serious issues and many will go to zero, resulting in permanent capital loss for investors. Surprisingly however, we saw many stocks with strong balance sheets, that are finally turning the corner after what can only be described as annus horribilis of 2009.
One such stock that we spotted was Defense Industries, which is trading at 1/3rd book value with a net cash position of nearly $1.2 million. What’s even more interesting, is that not only are you buying an actual dollar for 75 cents, but you’re also getting a decent business thrown in for free. The business itself is involved in producing a wide range of products in both the military and civilian defence sector.
Here’s my spreadsheet with historical financial data. Please note that the $4.5 million of income in Q1 of 2008 was extraordinary and a one-off.
Selected financial data
- Market value per share: $0.15
- Cash per share: $0.22
- Earnings per share for Q4: -$0.005
- Price to book value: 0.30
- Debt to book value: 11%
What’s most remarkable about DFNS is the stock performance, relative to the above financials over the past 6 years. As you can see from the Google Finance chart, the stock price has consistantly fallen, despite debt being reduced, book value increasing and a number of years of excellent earnings.
Risks
- Financial statements are unaudited (which is really par for the course with such small companies).
- The defense and personal protection industry is highly cyclical.
- The Israeli political environment is less stable than that of the United States, particularly with defence.
- Dividends are subject to double taxation (20% on the Israeli side, x% on your marginal rate for what ever country you reside in).
- Management may allocate capital poorly, eroding shareholder equity.
I believe the Defense Industries International offers deep value with a high margin of safety.