About Me

My photo
This is written with serious investors in mind. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Thursday, December 22, 2016

Two recent activist situations that are more compelling than ARIS: CDI and SEV

I wrote earlier this week about the absurd activist situation at ARIS, a company whose share price is up 20% last 52 weeks (about 2x the S&P); up from a market value of $20M in 2012 to nearly $100M today (about 30% CAGR) and has concurrently grown bvps over the same per by ~10% CAGR. In short, it is not the most obvious target for change.

Consider in contrast two companies where activist are more appropriately getting involved and that might be worth keeping an eye on: CDI and SEV.


On its best day this company - part temp placement, part perm placement, part "body shop" project work in the construction / oil & gas / aerospace / IT industries - dreams of being a combination of Jacobs Engineering and Booz Allen.

But it wakes up everyday with a stale brand in need of a refresh, due primarily to the neglect of an absent board that has generated fees for itself and its agents while destroying value for shareholders.

Compounding the neglect is an unusual ownership structure; 25% of the company is owned by the  "Garrison Trust", which itself is managed and owned by the board. It is the governance equivalent of chaining the kids (is shareholders) to the radiator so the parents can go out and play.

Family services is finally coming, under the name Radoff and Schechter, who have most recently sent this spot on letter to the board. If it doesn't wake them up, I'm sure there are a few more letters coming. Radoff and Schechter - the activists - have been on an absolute tear ripping new holes into a most neglectful bunch.

To be frank, I wrote negatively about CDI at the end of Sept when it was trading below the value of its working capital + PP&E - l/t liabilities. It was then a wonderful opportunity for deep value investors as it is now trading at 1.6x that asset value.

Beauty, they say, is in the eye of the beholder. I do not see beauty b/c I do not see a pathway to success. The brand is stale. The work is undifferentiated. The company may benefit under the l/t turnaround plan by the "interim" CEO who has experience managing growth at stale brands, but how "interim" is he and what value does the company add that others cant such that there is a wide and probable pathway to success?

The "deep value" investor doesn't truck with possible future pathways, they only need look at the value vs the balance sheet and have done well buying the stock at a discount to that value.


Speaking of possible futures and pathetic boards, here's one that may have both.

Sevcon makes motor controllers for electric vehicles. In the most simplest terms, their product sits between an electric power source and a motor, and allows them to talk to each other. (Consider a switch that sits between a power source and a motor, but is simply either on or off. A motor controller in contrast is a complicated switch that can manage a variety of parameters around the power, the heat, the torque, etc. and constantly manages the power going back and forth, under a variety of conditions).

Some companies like Tesla make their own motor controllers specific to their motors. SEV makes one that is programmable across different electric power sources and motors. An EE told me they are like DOS or LINUX of motor controllers, compared to other companies that make motor controllers equivalent to MACs, easier to program but with fewer parameters.

The value of SEV is they can modify / customize their software to solve for specific problems around drive trains and / or accessories. Their simpler, older generation products, were used in simple EV's like golf carts, electric motorcycles*, and in industrial equipment - scissor lifts, fork lifts, heavy machinery - a business now in steep decline.

* Just a note that Brammo - the electric motorcycle company - was acquired by Polaris in 2015, specifically for its drive train, which included a Sevcon controller. The "holy grail" for Polaris isn't an electric motorcycle - though it is trying to rejuvenate the Victory brand with that purpose in mind - but rather a drive train for an electric ATV, the better to quietly transport hunters through the great outdoors.

Meanwhile, the holy grail for Sevcon - and potentially investors - is moving up the value scale from smaller vehicles to larger 4-wheel vehicles, a business they stumbled onto a few years ago.

They are currently developing controllers for a handful of OEM's that could deliver a stream of future royalty payments if the products under development go into production and are successful with the consumer market.

From the last conf call ...

"We have more projects in the pipeline than never before and we expect the customer enthusiasm for Sevcon solutions will continue. We currently has five major projects in the development phase of the pipeline having added an extension to one of the four projects we mentioned last quarter. We expect two to go into production in 2017, one in 2019 and then two in 2020."

"With the addition of the new content for the high performance sports car manufacturer we expect total production revenue from these projects to be approximately $206 million over the five to seven year production life. This is up from a 166 million that we projected on last quarter’s call. We’ll then be adding on revenues for spares in the 5 to 10 years following completion of production."

... as I once learned: "buy in the order cycle, sell into the delivery cycle." This company appears deep in the order cycle and again, the possibility of a pathway to success. Nobody knows the future.

But back to the present, and back to the board of directors, it's a laughing stock, especially for a high tech company with potential growth ahead.

Someone is finally trying to change that.

One thing that makes this board so ridiculous is that the current chairman of the board actually lists in his bio (ie his achievements) funds that failed under or around his watch,  companies that went bankrupt around his watch, and a firm that was invested in a ponzi scheme around his watch.

He might not be the provocateur that causes problems but he sure carries them around like the stink on cheese. A more proactive board can instill top down changes, drive accountability, set targets, increase the RPM of the growth engine of a company. The slate of potential candidates proposed to replace the board could enlarge the possibilities of future success.

Nobody knows the future but in both these cases, someone is trying to improve the odds for success and that could bode well for investors.

-- END --


1 comment:

  1. oh plus this gem from the recently filed SEV 10-K:

    "Non-employee directors are each paid a retainer of $60,000, 50% in cash and 50% in the form of restricted stock. The Chairman of the Board of Directors receives an additional $20,000 per year, and the Chairmen of the principal committees receive the following additional amounts for their duties as such; Audit, $10,000, Compensation, $5,000, Nominating and Governance, $5,000. Members of the Audit Committee each receive an additional $2,000 for their duties as such, and the members of the Compensation and Nominating and Governance Committees each receive $1,500."