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RadiSys (RSYS) High Cash Stock Review

Randy — Fri, 30 Sep 2011 22:31:22 +0000

RadiSys RSYS 6.05 [0.00] High Cash Stock Review – A wireless infrastructure company.

RadiSys is leading provider in a wide variety of applications including 3G/4G/LTE wireless voice, data and video products and services; Deep Packet Inspection (DPI); femtocell, picocell and macrocell base stations; conferencing and Voice Quality Enhancement (VQE); and military command and control systems.

RadiSys promise is that they will deliver whatever is needed to bring your vision to market…and fast. Their newly completed acquisition of Continuous Computing along with their growth of next generation products has helped move Radisys from a limited growth with discounted value company towards a high growth company with value.

Introduction

RadiSys has an excellent reputation among its peers, but their core legacy business has been in a long term decline. Serving only a few very large clients appears to have obfuscated their future, and made RSYS a compelling value based upon what was perceived as poor to low legacy growth opportunities.

Next Gen

RadiSys launched their next generation products to relieve these issues, and offering some revenue growth, it helped stabilize them from declining path they had been on. However, even with the Next Gen products positive quarter over quarter, bottom line improvements remained elusive.

Continuous Computers Acquisition

The exciting part of this new company, RadiSys and the newly acquired Continuous Computer, is the growth forecast in third-quarter sales of between $97 million and $102 million. That is strong when compared to the company’s recent second quarter revenues of $79.9 million, finishing well above the consensus estimate of $72.7 million.

Previously, Wall Street guidance for the third quarter had been $71 million to $75 million, with between $17 million and $19 million of that a result of the Continuous Computing acquisition. That means Radisys is raising the next quarter revenue forecast 8-9 million. For the year 2011 sales are expected to reach between $345 million and $355 million, an increase of between 20 and 25 percent over 2010, and margins are forecast to be in the 34-35% range versus last quarter’s 29%.

The new RadiSys expects the future cost for R & D and SG & A will at first increase 5-6 million, mostly associated with the merger, then RadiSys is forecasting they will reduce their overall R & D and SG&A annual cost by 8-10 million due to synergies gains and reduced redundancies. Thus, they are forecasting about a 3.5 million dollar net reduction.

To summarize, RadiSys believes they can increase sales and margins while at the same time significantly lower their overall cost structure. This combination of increased sales on a lower cost would greatly accelerate their profit growth. As a result, RadiSys is now forecasting a 30% profit growth, based upon the midpoint of their 80-85 cent forecast for 2012 earnings.

Now that RadiSys has acquired Continuous Computing, they do not appear to have any overlapping clients. This allows for both of the prior companies product lines to be cross-sold into each other’s established client base. Adding to this expansion is that their newer service is designed toward the much faster growing wireless 3g and LTE markets. Maybe these help explain why Jefferies & Co is viewing this as a value and growth company.

Step 1 – We first search for companies with pristine balance sheets.

RadiSys has a balance sheet with 50 million in cash and about 50 million in debt, with most for the excess cash funds were used to buy Continues Computing. Even though the cash to debt is low for us, we believe the funds mostly used to acquire Continues Computing were well placed. However, the market appeared to give little to no increase in RSYS’s value.

Step 2 – We like extremely low values.

RadiSys is one of the lowest value companies that we could identify within the high growing wireless space. The enterprise value per share before their purchase was 4.50 and about 5.96 after, but next year’s profits are forecasted at 80-85 cents per share — which gives RadiSys’s potential yearly earnings a future PE of around 7.46 That’s quite low for a company that is forecasting about 30% profit growth. RadiSys is expecting next quarter’s revenues to be 97 million to 102 million, up from 79.8 for their just completed July of 2011 quarter. This would equate to a 22% quarterly growth, with strong organic growth and higher margins.

Step 3 – Is the operation or enterprise driving value to their shareholders?

The company’s second quarter revenues grew 8.5 percent sequentially to $79.9 million, well above the consensus of $72.7 million and the company’s guidance for $71 million to $75 million. Robust sales from the legacy Traditional Communications Networking segment drove the revenue upside.

RadiSys second quarter earnings totaled $0.18 per share, well above the Street’s estimate of $0.12 per share and guidance range of $0.10 to $0.15 per share.

If RadiSys can continue to execute on their long term plan and in delivering these very nice operational improvements, it should earn a much higher valuation.

Step 4 – Is this a good business?

The newly combined business is a significantly better business than the old one.

This wireless based business has an almost monopolistic market with very high cost to changing established solutions, has large barriers to entry and has few global competitors. In short, it is very valuable. RadiSys’s own next generation product has a 40-50% margin, up from about 30% for their legacy product. As their older legacy products continues to decline, adding the higher margin Continuous Computing to this model results in a growing high margin business (Next GEN and Continuous.) With the lower margins business (Legacy) shrinking, the margins should see good growth even before factoring in cost reductions.
A couple of noteworthy comments

Historically RadisSys has 100% of their manufactured products produced in Asia, where the Nokia Siemens network was their largest client with around 34% of revenues in 2010. Last year their revenue breakdown was 34% North America, 28 EMEA, and 37.5 Asia, and such a diversified business is more like to withstand a single continent’s fiscal problem.

Step 5 – Is the Train Wreck and then the fog from the Wreck clearing?

When finding companies with a lower enterprise, often a “Train Wreck” is needed to drive value close to cash. We identified 3 major issues that have kept the value so low:

1. Poor 5 year growth record.

2. First profits in a while.

3. Large decline in legacy sales.

New management, along with the combination of their next generation product and a well placed purchase, gives the company the ability to morph into a new company with expanding margins while also substantially reducing costs. They delivered a very strong quarter and showed real bottom line progress, even before factoring in the acquisition.

This last quarter, much more profitable than forecast and reflecting only a particle integration of Continuing Computing, showed that the underlying fundamentals were improving and once again delivering true profits, even prior to the synergies of sales growth and cost reductions. After close examination, the business appears to be changed from a legacy low margin dining business to quite possibly, a dynamic high growth company.

Here are some ratios to help value RadisSys:

Sales Valuation Ratios

RadisSys forecasts sales of 350 million. With a market capitalization of 171 million, that’s a price to sales of 48 cents of value for every dollar of sales. Price to Sales average for the industry is 0.78, and the S& P 500’s average is 1.42 according to Zack’s. RSYS would need to advance to a 11.23 value to be at parity to the industry.

PE Valuation Ratios

Comparing the new 0.825 cents midpoint forecast for 2012 to the average analyst forecast prior to the last quarter, which was $0.52, reveals a 63% increase in forecasts. If RadisSys were aligned to their industry’s benchmark average PE of 11.5, the new company based forecast would give about a 9.487 value.

In Summary

We enjoy companies that can provide outstanding short term execution — turning weaknesses into real strengths. Along with bringing down costs and substantially increase cash flow, management has endeavored to greatly enhance the company’s growth prospects and the business model with many new “green-er” solutions to drive future success.

Disclosure

Durig Capital owns RadisSys for itself, our clients and other client related accounts. When we published this article the stock was $6.12 per share.

Sincerely,

Randy Durig
Financial Investment Advisor
DIR 971-732-5119

A+ Rating
with the BBB!

- Always Serving Your Interest First -

971-327-8847 TEL 877-720-3010 TOLL FREE

Durig.com | Investment-Income.net

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TravelCenter of America (TA) High Cash Stock Review Update:

Randy — Fri, 12 Aug 2011 19:03:15 +0000

By Randy Durig CEO of Durig Capital

Travel Centers of America LLC (TA)

Stock Quote:

TA 4.41 [0.00]

4.21 Per share values on 8-10-2011:

Introduction

TravelCenters of America has provided outstanding operation leverage, which is possibly greater than any company we have reviewed, including Adam’s Resources, whose equity has performed extremely well since it was included in our High Cash Stock Review portfolio. We have been following TravelCenters of America for a while, knowing that the lease from their parent company seemed to be financially prohibitive and was penalizing their market valuation.

The company showed an extremely strong quarterly improvement and forecast a profitable net income for 2011. Despite broad industry weakness and weaker competitors, TravelCenters is poised for a potential multi-year improvement cycle while others are leaving the market. The company performed extraordinarily well last quarter with surprisingly strong execution, and the per share earnings exceeded expectations, especially considering the recent dilution.

Operations

Company operations, judged by profits per share, increased 14 times. Non-fuel sales saw a nice increase in sales and prices, with margins remaining about the same. Although fuel sales had a slight 4.3 % increase, the profit margin was reduced. Both the non-fuel increase and the fuel margin helped improvement profits to 0.99 cents per share in the quarter, versus 0.07 cents for the same quarter the previous year.

In the new lease agreement, costs classified as rents decrease $10.7 million in this quarter. This newer agreement also changed interest rates to 0% from 1% a month, which reduced interest expenses by about $2.2M for the Q2 2011. With both improvements exceeding our rosiest forecast, we believe the execution and cost savings are sustainable. We also believe the cost savings of the most recent quarter have an extremely high probability of recurrence, and that we will continue to have quarterly improvements of similar magnitude impact the remainder of this calendar year. Together, these two factors should have about the same improvement year over year for each quarter of 2011.

Business Execution

The ability for Travelcenter of America to continue executing at this level is much more questionable even though they had a 6 million dollar operating profit improvement year over year. To meet or exceed this level of improvement would be challenging given the slower economic growth and fast moving prices, but we believe that some improvement is possible. TravelCenter of America had an 11 million dollar improvement year over, which they achieved in the first quarter 2011.

The dilutive effect of the recent secondary offering hurt their stock performance dramatically, and as it appeared both then and in hindsight today, it was a very poor move for shareholders. To gain seven properties they spent over $31 million and committed to future improvements, and to attain these additional company owned stores they raised just over 50 million dollars in equity sales. By significantly diluting the ownership of existing shareholders, mathematically we see this 7 store tradeoff as a significant dilution to the earnings per share for current and future quarters, which is in our opinion the reason for the severe drop in stock price. As shareholders, we contacted the company to protest these stock transactions, and asked to speak to upper management. However, they never returned our calls.

We seek that both TravelAmerica and their shareholders move to put true independents on their board, in order to insure that all board members understand their fiduciary duty to put the shareholder’s interest first. To read further about the major conflicts of interest this board has had in the past, please review the following linked article. Read about the directors of TA here: Relationship With Hospitality Properties Trust Is Key, Part 2

TravelCenter of America at 2010 year end had about $105 million worth of unrestricted federal loss carryover. This could allow them to run a profitable operation without paying federal taxes for at least a couple of years. This should boost after tax earning per share going forward. Simply put, this quarters tax drag was 1% and we can expect very little, if any, until this provision is depleted.

Summary

TravelCenters of America sits in the sweet spot of our greatly distressed value model, having the possibility for large profitability improvements. We enjoy owning highly distressed value companies that can potentially provide outstanding profit growth, and that is why TravelCenter of America fits our model.

With the next two quarters, we expect close to 0.70 per share improvements each quarter just from the lease savings. The wild card is both the execution and costs, and whether they can repeat by adding another 0.22 per quarter going forward.

Travel centers of America earned 0.26 cents in Q3 2010 and (- 1.71) in Q4 2010. Assuming only the baseline 0.70 cent improvement that was added to last year’s .26 cents (without any additional improved execution), we are looking at 0.97 cents. Adding the wildcard of execution and costs improvements could bring it as high as 1.23. Applying the same math for forecasting Q4 2011 brings the expected loss to around (-0.73). Operationally, if they execute well, additional improvements could result in an earnings power in excess of 0.75 cents for the calendar 2011 year.

Conclusion

We believe that TravelCenter of America is trading at about a 6x’s P/E with outstanding improvements in bottom line profits, making it quite discounted to many of their peers and well below most companies in the convenience store industry. We see TravelCenters of America reporting a greatly improved year, and due to their discounted value and huge leverage, we are currently keeping them in Durig Capital’s High Cash Stock Review portfolio.

We hope moving forward that management will not accept large dilutions to shareholder’s value for minor incremental improvements in sales and stores.

Disclosure

Durig Capital owns TravelCenters of America for itself, clients and related client accounts.

Sincerely,

Randy Durig

Financial Investment Advisor
DIR 971-732-5119

A+ Rating
with the BBB!

Durig.com | Investment-Income.net

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High Cash Low Enterprise Value Stocks: Second Quarter 2011 returns

Randy — Fri, 22 Jul 2011 22:47:03 +0000

The 2Q quarter of 2011 had been our first down quarter in a year, reducing our annual gains to a still very respectable 37 percent but down from over 50% in just the prior three quarters alone. Utilizing our selection criteria, the simple math aggregate of the holdings in the High Cash Stock Review portfolio was up down -14.75 % compared to the S&P 500 being down -1.07% since the last quarter.

In each of the prior three quarters the High Cash stock review significantly surpassed the S&P 500 index. In the first quarter it was up 14.88% compared the S&P 500 index being up 5.42%. Its gain was very close to its second quarter lose, putting the year to date gain at 0.07% compared to the S&P’s 4.35%. In the fourth quarter of last year, the High Cash Stock review was up a strong 20.38% percent compared to the S&P 500’s gains of 9.92% (please review it here), while its third quarter 2010 performance delivered a rewarding with 16.68% returns compared to the S&P 500’s 10.62% return.

Using distressed Enterprise Values in an evaluation of the ongoing operation, combined with eliminating the cash and or debt from a companies market value, seems to provide a unique way to judge the lower valuation of the company. With that said, if we can buy an enterprise that has such a distressed valuation that the underlying company has very little to perhaps even a negative valuation, then buying the operating core of the company for so little has so far, over time, become very rewarding for our clients.

We attempt to profit from these unique and sometimes quite fearful situations, knowing that the only real outcome will probably take time. This takes a very disciplined and well rounded review process, focusing on companies that provide high cash flows, superb business models and increased earnings forecasts. But even with this very high level of criteria, we still have of challenges. Even using such strict discipline, we acquired DGW, which to date has been very disappointing with the current trading of it being halted.

The select few that make the cut are included into our High Cash Stock Review. Below are the equity positions included in this portfolio that evidenced the previously noted characteristics when first published on Seeking Alpha, and were held for the entire period.

The First Quarter is added to the second half of 2010 based on simple math is:

Time	High Cash Stock Review.	S& P 500
Second Quarter 2011	-14.75 %	-1.07%
First Quarter 2011	14.88 %	5.42%
Fourth Quarter 2010	20.38%	9.92%
Third Quarter	16.68%	10.90%
Total	37.19 %	25.18 %

Second Quarter 2011 performance on our listed stocks compared to our first:

Company	Second Quarter 2011	First Quarter 2011
China Yuchai International Limited (CYD)	- 29.26 %	-7.45 %
Homeowners Choice, Inc. (HCII)	- 18.78 %	1.24 %
KHD Humboldt Wedag International AG (KHDHF.PK)	-16 11 %	12.22 %
LoJack (LOJN)	-7.62 %	27.4 %
O2Micro International Ltd. (OIIM)	-15.03 %	22.98 %
Openwave (OPWV)	- 2.29 %	0.94 %
The Bancorp Inc. (TBBK)	11.88 %	-9.24 %
Tessera Technologies Inc. (TSRA)	-6.23 %	-17.56 %
Silicon Graphics International Corp (SGI)	-19.66 %	136.99 %
Sonus Networks, Inc. (SONS)	14.05 %	40.82 %
Terra Nova Royalty Corporation (TTT)	-7.58 %	10.24 %
TravelCenters of America (TA)	-28.85%	New last quarter
Duoyaun Global Water (DGW)	-35.76	New last quarter

*Dividends not included

It again appears that the top performers of one quarter are often the worst in the next, as Silicon Graphics was by far the best performer in the first quarter, and was down the most among our established positions in the second. Even though it appears our selection process works, it appears that our timing could improve.

In light of that, we are still holding Duoyuan (DGW) and our analysis of it is available here. We believe if the cash balance was accurate at over $6 per share, the underlying equity should receive a premium over the cash value, as most other companies do. This is our worst selection we believe ever to date, but with that said, last year’s worst selection was up over 150% in the first quarter of 2011 alone, making it our best performer this year.

We started the High Cash stock portfolio with the understanding that very low enterprise values may some protection from a broad market sell off. Positive earning, cash flow that provides profit increase, and potential stock price expansion are all examples of things that assist in raising these very low values, and so far the evidence and performance we have measured in a rough but upward trending market seems quite impressive.

We had no changes in the portfolio in the second quarter due to the high volatility.

Disclosure: Both Durig Capital and its clients have positions in all the above positions. Performance is bases on written reports published as High Cash Stock Review.

These both are hypothetical portfolio illustration and no money was invested by clients or Durig Capital in this enclosed published manner. Hypothetical only takes into consideration all High Stock Reviews or Investment and Income stock position that were written and publicly published plus held for the entire quarter. Any new position or liquidate position that occurred in the published quarter were not included in the performance. This assumes all positions have an equal investment value at the beginning of each quarter. This is purely a hypothetical account and actual performances of individual active accounts have preformed both above and below the hypothetical returns in the past and most probably will in the future. Past returns are in no way indicative of any guarantees of possible future returns. Individual suitability and advice should be sought about any particularly matter or circumstance.

China Yuchai- Value time again: High Cash Stock Review.

Randy — Mon, 23 May 2011 22:39:00 +0000

China Yuchai International Limited (CYD) – High Cash Stock Review
A diesel engine manufacturing company.

Per share values on 5-23-2011:

Market value	$ 20.70
Stocks	$ 1.09
Cash	$ 17.30
- Debt	$ 6.28
Equity value	$ 8.59

Introduction:

Upon our current review we are adding to our China Yuchai International positions. We first wrote our High Cash Stock Review of China Yuchai International Limited (CYD) and the stock performance has been robust since then. The original review can be found here.

Great Balance Sheet:

China Yuchai International has $17.30 of cash per share minus their debt of $6.28 per share giving them a net cash of $11.02 per share. They also have $1.09 in two investments, HL Global Enterprises Limited and Thakral Corporation Ltd. Taking the cash and stock out it equates to the remaining enterprise having only just a $8.59 per share value. They earned a very solid $0.94 a share in the Quarter ending March 31 2011, and in the last four quarters their profit totaled $4.41 per share. The profit from equity operations for the last 4 quarters works out to be 51%, a very high return on the enterprise. China Yuchai International can still be considered greatly undervalued and we are currently adding to this position, as we still believe that the high levels of cash are camouflaging the true earning power of the company.

The Business Execution:

China Yuchai International is facing a slowdown in Automotive diesel engine production, which is possibly more the result of an oversupply or inventory correction. With overall sales down year over year, China Yuchai still delivered a very strong quarter and is easily showing growing earnings power as underlying margins expanded even with lower revenues.

Low Value:

The Auto Truck peer groups trade about 1.51 times sales. China Yuchai International had about 2.4 billion in sales last year, which works out to be about $63 per share in revenues. If China Yuchai International received a similar metric as their peer group, of 1.5 times the 2.4 billion in sales would alone imply a market value of about $94.73 per share.

Ratios

China Yuchai International

Industry

S&P 500

Price to Enterprise Sales

0.38

1.51

n/a

The $4.41 per share earned during the last 12 months gives them an enterprise PE of 2.
The current peer groups trade about 17.70 times enterprise P/E. Applying this metric, would give China Yuchai International a value of about $ 78.05 per share plus $12.11 of cash and investment thus creating a market value of $90.16.

Ratios

China Yuchai International

Industry

S&P 500

P/E to enterprise

17.70

Conclusion:

We believe that China Yuchai International is currently trading at about a 80% discount to the Auto and Truck peers even though the underlying stock has appreciated significantly since we included them in our High Cash Stock Review.

The core business appears to be very well run with a solidly branded product that has limited direct competition, especially on the high end. They have proven with positive results that they have well over $ 4.00 of earning power, with the peak possibly being closer to $6.00. It appears that based on either the operational profits or the sales of their industry peers, the enterprise value of the China Yuchai International is trading at about an 80% discount. Few of their peer group, if any, over the time since we first recommended them have delivered greater profit growth. We believe China Yuchai International still presents an extremely strong value and should trade significantly higher.

Disclosure: Durig Capital and its clients currently do have positions in China Yuchai International (CYD).

Disclosure

Durig Capital owns China Yuchai International for itself, clients and related client accounts.

Sincerely,

Randy Durig

Financial Investment Advisor
DIR 971-732-5119

A+ Rating
with the BBB!

Durig.com | Investment-Income.net

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Tollgrade (TLGD) has been removed: High Cash Stock Review

Randy — Mon, 04 Apr 2011 01:10:20 +0000

We have removed Tollgrade Communication Inc. (TLGD) from our High Cash Stock Review portfolio. We first published our Tollgrade report on August 26, 2010 with a stock value of $6.50 per share and one can read our initial review here.

While continually monitoring Tollgrade, material information arose last week and a full review ensued. The reason for Tollgrade’s removal is due to the board off directors agreeing in principal to a cash sale to Golden Gate Capital. Golden Gate Capital is a private equity firm with $9 billion in assets. The all cash offer was $10.10 per share and below where the company was trading just before the announcement (as high as $10.20). There is little to no evidence that Golden Gate Capital will be paying a control premium which is often the case when firms go private.

Tollgrade’s current cash holding after removing all long term debt is about $5.52 per share. This equates to Golden Gate Capital purchasing the entire company for about $4.58 in out of pocket funds. The enterprise value of $4.58 per share is quite low for a company that in the last three quarter had $0.45 per share of operation profit. Our estimate, based on the last three quarters, is that Golden Gate purchased the enterprise for only 7.6 times operational profit or at a substantial discount compared to the S&P 500.

Management could and should have tried to attain a higher price. The only way for share holders to realize the possible higher value is by means of costly litigation. Many suites are claiming Tollgrade’s board of directors breached their fiduciary duty to shareholders. Since our duty and focus is to our clients, we believe these ongoing legal issues are not in the best interest for clients or provide the best current opportunity for their investments. Since the firm is trading at $9.99, we have exited with over a 50% gain for the 6 month holding period.

Disclosure

Durig Capital did owns Tollgrade for himself, clients and related client accounts but has know sold all position in all accounts.

Sincerely,

Randy Durig

Financial Investment Advisor
DIR 971-732-5119

A+ Rating
with the BBB!

Durig.com | Investment-Income.net

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Tollgrade News:

First Quarter 2011 Preformance Update: High Cash Stock Review

Randy — Mon, 04 Apr 2011 00:54:03 +0000

Low Enterprise Value Stocks

The first quarter of 2011 has been very good considering the many global and domestic events. Utilizing our selection criteria, the simple math aggregate of the holdings in the High Cash Stock Review portfolio was up a strong 14.88 % compared to the S&P 500 5.42% gain since the new year.

In each of the last three quarters the High Cash stock review significantly surpassed the S&P 500 index. In the fourth quarter, the High Cash Stock review was up a strong 20.38% percent compared to the S&P 500’s gains of 9.92%. Please review our update.

Our third quarter 2010 performance delivered a rewarding 16.68% returns compared to the S&P 500’s 10.62% return.
Using distressed Enterprise Value in valuing the ongoing operation, combined with eliminating the cash and or debt from the companies market value, this seems to give a unique way to judge the lower valuation of the company. With that said, if we could buy an enterprise that has such a distressed valuation that the underling company has very little to even a negative value, buying the operating core of the company for so little over time has so far become very rewarding for our clients.

We try to profit from these unique and sometimes quite fearful situations, knowing the only real outcome might take time. This takes a very disciplined and well rounded review process, focusing on companies that provide high cash flows, superb business models and increased earnings forecasts, even with this very high level of criteria we still have of challenges. The select few that make the cut are included into our High Cash Stock Review. Below are the equity positions included in this portfolio that had these characteristics when they were published on Seeking Alpha and have been held for the entire period.

The First Quarter is added to the second half of 2010 based on simple math is:

Time	High Cash Stock Review.	S& P 500
First Quarter 2011	14.88 %	5.42%
Fourth Quarter 2010	20.38%	9.92%
Third Quarter	16.68%	10.90%
Total	51.94%	26.25%

First Quarter 2011 performance stocks:

Company	2011 Year to Date	Fourth Quarter 2010
China Yuchai International Limited (CYD)	- 7.45 %	63.14 %
Homeowners Choice, Inc. (HCII)	1.24 %	* 29.69 %
KHD Humboldt Wedag International AG (KHDHF.PK)	12.22 %	22.76 %
LoJack (LOJN)	- 27.4 %	New to the portfolio
O2Micro International Ltd. (OIIM)	22.98 %	(- 1.44) %
Openwave (OPWV)	0.94 %	New to the portfolio
The Bancorp Inc. (TBBK)	-9.24 %	44.02 %
Tessera Technologies Inc. (TSRA)	-17.56 %	19.55 %
Silicon Graphics International Corp (SGI)	136.99 %	11.21 %
Sonus Networks, Inc. (SONS)	40.82 %	(-27.76) %
Terra Nova Royalty Corporation (TTT)	10.24 %	*14.61 %

*Dividends not included
It appears again that the top performers one quarter are often the worst the next as Silicon Graphics was by far our worst performer last year. Since the new year, SGI has been just outstanding providing over a 135% return . With Sonus being the single worst stock in the fourth quarter of 2010, it again rebounded like many other laggers we own with over a 40 % increase in the first quarter of 2011. Even though it appears are selection process is working, it appears out timing could improve.

With that said, we are still holding both Duoyuan (DGW) our analysis will be available here and LoJack (LOJN) our review here we beleive our original investment thesis is correct in both selections, but only time will tell, we have seen news in both but neither has shown a fundamental change since we published. Knowing both SGI and Sonus are driving the portfolio returns this quarter we are very pleased we stayed to our disciplined approach when they both show similar stock signs in 2010 that DGW and LOJN is showing today..

We started the High Cash stock portfolio with the understanding that very low enterprise values may provide protection from a market sell off. Positive earning, cash flow providing profit increase, and possible stock price expansion are all examples that assist in raising these very low values, so far, the evidence and performance we have measured in a rough but upward trending market seems quite impressive.

Updated portfolio review:

Additions

Again we added Duoyuan Global Water Inc (DGW) to the portfolio in February with our review here. Even though we announced it in the last month since then it has taken a significant loss in stock value since our initial review, and like companies that have provided tremendous gains we have not included it in the performance metrics since it was not included in the portfolio at the start of the period.

We added TravelCenter of America (TA) to the portfolio in March with,our review available here, we were able to find it a 6 billion dollar sales company with under 100 million dollar enterprise value, while uncover possibly up to 40% of company value has often in-mentioned underlying ownership in real estate .

Disclosure:

Both Durig Capital and its clients have positions in all the above positions. Performance is bases on written reports published as High Cash Stock Review.

These both are hypothetical portfolio illustration and no money was invested by clients or Durig Capital in this enclosed published manner. Hypothetical only takes into consideration all High Stock Reviews or Investment and Income stock position that were written and publicly published plus held for the entire quarter. Any new position or liquidate position that occurred in the published quarter were not included in the performance. This assumes all positions have an equal investment value at the beginning of each quarter. This is purely a hypothetical account and actual performances of individual active accounts have preformed both above and below the hypothetical returns in the past and most probably will in the future. Past returns are no way indicative of any guarantee of any possible future return. Individual suitability and advice should be sought about any particularly matter or circumstance.

Duoyuan Global Water Inc. (DGW) High Cash Stock Review

Randy — Sun, 03 Apr 2011 23:53:53 +0000

By Randy Durig CEO of Durig Capital

Per share values on 02-25-2011:
Market value $9.15
Cash $6.29
Equity value $2.86
Shares 24.61 million

Duoyuan Global Water Inc. is a leading China-based water treatment equipment supplier. They have been continuously developing advanced water treatment technologies for multiple end users including municipal, industrial, and residential clients. Currently, they offer more than 100 water treatment solutions.

We selected Duoyuan Global Water Inc. because it is one of the select few that fit our model. Our goal is to select, purchase and continually monitor companies in an effort to obtain outstanding performing investments while minimizing risk by finding low values for our clients. We will cover part of our review and selection process as well as explain why Duoyuan Global Water made the cut and is the latest addition to our High Cash Stock Review.

Introduction

Duoyuan Global Water is seen as an innovator in the low cost Chinese clean water services. They are focusing their efforts on developing advanced technologies, increasing production capacity, exploring potential markets and expanding their market opportunities. They provide customers with SO9001 Quality Certification, ISO 14001 Environmental Certification, and Six Sigma methodology. Duoyuan is focusing on both their internal efficiencies and further enhancing customer satisfaction. Products regarding technology, quality, service and innovation have become a focus as they aspire to become China’s leading supplier in the water industry.

Duoyuan Global Water is extremely well positioned in a desirable and infinitely growing industry. Demand from both society and industry for water in China is expected to develop exponentially. According to the Joint Monitoring Program for Water and Sanitation of WHO and UNICEF, about 100 million Chinese still do not have access to an improved water source as of 2008 and about 460 million did not have access to improved sanitation services. Progress in rural areas appears to lag behind what has been achieved in urban areas. Some parties have claimed that water in China may be even more valuable than petroleum.

60% of China’s 661 cities face seasonal water shortage. Over 100 cities have severe water constraints, such as contamination of drinking water from upstream sewer and feces flow. This is a critical health problem that could and does causes serious illnesses. A study by UNICEF in 11 provinces found that over half of all drinking water samples contained unacceptably high levels of bacteria.

Shanghai, like many other Chinese cities, depends on surface water that is heavily polluted, such as the Huagpu River shown here whose water comes through Suzhou Creek from the heavily polluted Tai Lake.

Step 1 – We first search for companies with pristine balance sheets.

Duoyuan Global Water has $6.29 million in cash with no debt on the balance sheet. They had sales of $51.5 million last quarter meaning an annual run rate of about $200 million or $8.13 per share annually. The stock price minus the cash on hand gives them an enterprise value of about $2.86 per share. This is a strong balance sheet and $2.86 per share is a very low enterprise value especially when they earned $0.55 per share in the last quarter alone. This is an amazingly low level considering the growth potential and required infrastructure that Duoyuan Global Water caters to as China may be one of the unhealthiest and largest population center in the world. The enterprise value trades at only 5.5x last quarter’s profit. Annualized, the last quarter’s earnings illustrate a 1.3x to enterprise value which is one of the lower we have seen. The enterprise is earning about an 18% rate of return after tax, again based only on the last quarter. The enterprise value is very low considering they have an average earnings forecast for 2011 of $1.67 per share. Based on the average analyst forecast, Duoyuan Global Water has an enterprise value after tax return of over 50%.

As a secondary note: Having a mountain of cash and no debt is considered a very conserve business model, especially when one considers this has been a very high growth company in a rapidly expanding industry.

Step 2 – We like extremely low values.

After reviewing hundreds of companies for the rare strategic position of growth and value, if not thousands, Duoyuan Global Water is one of the lower valued companies that we could identify. The enterprise value per share is a mear $2.86. Sales last quarter were $51.5 million up 35 percent year over year. Profits were $0.55 per share which were up an amazing 121% year over year. During the last nine months of 2010, sales were $119 million. Their $51.5 million single quarter sales were close to the entire enterprise value of $70.3 million. These are very low valuations for a high margin sector.

Step 3 – Is the operation or enterprise driving value to their shareholders?

Duoyuan Global Water has been executing at high levels over the last year. On virtually every valuation metric, they have generated strong growth and profitability. They are trading below some benchmarks that turned out to be very strong recommends such as our review on Adam’s Energy (AE), and Universal Health Insurance (UVE) such as realizing higher returns on their enterprise. But Duoyuan Global Water is in a far more exciting industry, growing substantially faster in sales all while making the top tier of profit growth for companies we review. Understanding that they have close to $2 of earning potential per year per share, we find it difficult to identify firms in the current climate that have the ability to generate a 66% return after tax relative to the enterprise. In the last reported quarter, they generated $0.55 in profits with the average analyst estimating a profit of $0.48. The 14% earnings surprise was attained in part by solid growth, believing short term orders might have peaked and also permanent cost reductions due to decreased advertising. After analysing Duoyuan, their structure and industry position reminded us of another Chinesse firm we reviewed called China Yuchai International know as (CYD) which has performed very well since inclusion into the High Cash Stock Review.

Management believes the reduction in marketing cost will not affect their on going business as they still are forecasting 29% growth rate which is quite strong. Mr. Wenhua Guo, the Chairman and Chief Executive Officer, stated,

“This quarter’s revenue increased due to strong demand from all three product segments, which was partially due to a change in the timing of sales as some customers shifted fourth quarter purchases to the third quarter in order to meet the completion deadlines of China’s 11th Five Year Plan”

Step 4 – Is this a good business?

This is an extremely well positioned business in an intriguing industry. There are numerous competitors in the Water and Sewer pollution control business. As China’s demand increases, we believe that being an organically developed Chinese company selling to the Chinese municipal and federal governments may be a competitive advantage. Most of their competitors are global firms with few being based in China. We believe this may allow them to have a true advantage in the semi closed socialist economy.

Step 5 – Is the Train Wreck and then the fog from the Wreck clearing?

With this case a very low enterprise value, often a “Train Wreck” is needed to drive value close to cash. We’ve identified six major issues that in part have driven the value so low:

1. Accounting irregularities
2. Law suit on accounting
3. Business built on a distribution model
4. China is their only market place
5. World class competition try to gain access
6. Additional risk and issues.

Step 5 – Is the Train Wreck and then the fog from the Wreck clearing?

With this case a very low enterprise value, often a “Train Wreck” is needed to drive value close to cash. We’ve identified six major risk and issues that in part have driven the value so low:

1. Accounting irregularities
2. Law suits on accounting
3. Business built on a distribution model
4. China is their only market place
5. World class competition tries to gain access
6. Additional risk and issues

1. Accounting irregularities

This is the 800 pound gorilla. They have a sister company called Duoyuan Printing Inc (DYP). With similarities in the name and having the same Chairman, Duoyuan Printing Inc is being accuses using poor accounting policies leading many to assume that these possible irregularities may be issues with both firms. Investors amicably assumed both companies are guilty. This report is focused on Duoyuan Global Water and we will not go into Duoyuan Printing Inc issues here.

Looking into the accounting at length, first they have and had different accounting firms in the recent past. That Duoyuan Global Water used a major accounting firm (our CPA clients believe that Grant Thornton is well respected) should give legitimacy. They claimed that Grant Thornton Hong Kong was purchased by BDO and this BDO announcement confirms the statements.

Many companies we follow due to mergers or acquisitions have had this occur. For example, if BDO audits a major distributor of Duoyuan Global Water equipment, then the can not do a fiduciary audit based on both the distributor and Duoyuan Global Water when a large part of revenue for one is from the other. In this instance, BDO needs to owe its loyalty to just one and usually the larger revenue provider is chosen as possibly the case here.

With that, Duoyuan Global Water submitted a SEC 6-k in December, 2010 that said:

DUOYUAN GLOBAL WATER INC.

Form 6-K

On December 24, 2010, Duoyuan Global Water Inc.’s (the “Company”) public accounting firm, JBPB & Co. (formerly Grant Thornton (“GT Hong Kong”)), resigned as the Company’s accountants due to its merger of business with BDO Limited.

GT Hong Kong was engaged to audit the Company’s financial statements for the financial years ended December 31, 2008 and December 31, 2009. GT Hong Kong’s reports for such years did not contain any adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principle. Additionally, during the Company’s two most recent fiscal years and any subsequent interim period, there were no disagreements with GT Hong Kong on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of GT Hong Kong.”

After leaving Douyuan Global Wate, and upon review the above SEC filings, BDO claimed in a SEC filing:

“in relation to the changes of accounting client Dougyaun Global Water Inc. We agree with the statements made in response to the form 6-k insofar as they relate to our firm”

With that said BDO has signed off, giving Duoyuan Global Water a clean bill of accounting health for 2008 and 2009:

In the second SEC filing listed above, BDO has nor had anything to gain. Duoyuan was no longer their client.
BDO could lose greatly in a post Arther Anderson world where fraudulent accounting can kill the account auditing firms. After such an announcement, if fraud truly did occur, both BDO and Grant Thornton have introduced themselves to the possibility of a very large liability.
Grant Thorton and BDO are considered top notch accounting firms.
Anyone including BDO monitoring the stock knew there were accounting rumors prior to the BDO letter filed with SEC.

On a lessor note, as Douyaun was asked to leave Grant Thornton Hong Kong (Now BDO) they accepted Grant Thornton (China). Grant Thornton International claims it’s global accounting organization has combined global revenues of $3.7 billion from its 96 member firms last year – while staying each member firm within Grant Thornton International is a separate national firm.

Duoyuan Global Water audited 2010 earning will come under Sarbanes–Oxley Act of 2002 rules, and their annual report expected March 23, 2011 if containing fraud, would possibly be considered a serious criminal act, both for the involved parties at Grant Thornton and Duoyuan Global Water.

What this indicates is that Duoyuan Global Water is staying within the Grant Thornton global accounting organization and possibly sharing many of their you say the “franchise” services: Global accounting firms must have compliance officers, and obvious with this said, Grant Thorton International did not “RED FLAG” this inter-organizational transfer, what would be a compliance officers duty if illicit accounting was at all suspected.

2. Lawsuits

The lawsuits are based on their accounting. If Duoyuan Global Water, BDO and Grand Thornton are incorrect regarding their accounting and fraud is discovered, the attorneys have already lined up and the costs could increase dramatically. Worst case scenario, this could be the end of all three especially after they claimed in their SEC filing to have achieve acceptable accounting in 2008 and 2009.

3. Business built on a distribution model

Duoyuan Global Water depend on distributors for all of their revenue. They have no long-term distribution agreements and most agreements have terms of one year. As existing distribution agreements expire, they may be unable to renew or possibly with un-favorable terms. They compete for quality distributors with both international conglomerates and local companies with many listed below. Their competitors often enter into long-term exclusive distribution agreements that effectively prevent their distributors from selling their products.

3. China is currently the only market Duoyuan Global Water operates in

Even though the demand and growth in China is quite high, the lack of global diversification could limit growth if the Chinese economy has an recession or the municipalities become underfunded.

The Chinese government may change overnight how or with whom they do business. Cronyism could lead to changes with whom government officials favor and/or dislike.

4. Competitors

Duoyuan Global Water has many competitors both from China and abroad. Part of their growth plan is to offer a wide variety of products and solution to obtain a higher degree of market penetration with add on solutions to each possible client and issue that may arise. Even though there are numerous competitors, Duoyuan Global Water has few if any that compete across all product lines. The cradle to grave approach, one stop shopping, to product and service offerings, that competition has yet to achieve, tends to allow firms to outperform competition.

Circulating Water Treatment Equipment:

Zhejiang De’an New Technology Development Co. Ltd. (China)

Jiangyin Jialong Environment Technology Co.Ltd. (China)

Beijing Kejingyuan Technology Co. Ltd. (China).

Automatic filter competes with:

Claude Laval Co. (USA),

Amiad Filtration Systems (Israel) (LSE: AFS.L )

Beijing Luolun Filtration Equipment Technology Co. Ltd. (China)

Water Purification Equipment and ozone generator competes with:

Ozonia Ltd. (Switzerland)

ITT (Sweden)

Jiangsu Koner Ozone Co., Ltd.(China).

Pure water equipment with EDI functions compete with:

GE Water & Process Technologies (USA) (NYSE:GE)

CANPURE Corporation (Canada)

Zhejiang Omex Environmental Engineering Ltd. (a subsidiary of Dow Chemical) (USA)(NYSE:DOW)

Microporous aerator competes primarily with:

REHAU (Germany),

ITT (Sweden)

Yixing Nopon Environment Co. Ltd. (China).

Belt-type thickener-filter press mono-block machine competes with:

Wuxi Tongyong Machinery Co. Ltd. (China),

DWT Project Co. Ltd.(Finland)

Passavant-Roediger GmbH (Germany).
Many of the competitors, especially the international arena, posses stronger brand names, has greater access to capital, longer operating histories, established relation ships with customers, stronger research and development capabilities and greater marketing and other resources than Duoyuan Global Water.

5. Additional risks and issues

A. Even though BDO signed off that accounting was acceptable, this is not guarantee that there were no incorrectly or intentionally misstated entries. This is still a possibility, although the risk of have something terminally wrong is now very slim, in our opinion. This risk is not unique to just Duoyuan Global Water as all entities may potentially have the same issues.

B. Knowing they have a great balance sheet, most companies that we have reviewed postmortem are loaded with debt and can’t pay the current accounts due. This is completely the inverse. With no debt and high levels of cash, there are no debt covenants management must meet to stay liquid, as is often the case with heavily leveraged firms

C. Chinese companies are notorious for accounting irregularities. Some of these companies currently have higher valuation, even after accounting issues were recently exposed than Duoyuan Global Water has; keeping in mind no wrong doing has been exposed just rumored. We believe Duoyuan Global Water has a superior balance sheet and is positioned well in a high growth environment.

D. There is a very high level of short positions and they possibly could identify additional risk other than accounting that we are not aware of.
In Summary

We enjoy companies that can provide outstanding short term execution— positioned with possibly a superior business model driving their future success. We believe Duoyuan Global Water has a great value, business execution, and has a conservative balance sheet that fits our model. We are optimistic that Duoyuan Global Water will outperform their higher valued peers. They have completed excellent quarters and have already attained growth of assets.

1. PE Benchmark Review

Valuation Ratios	DUOYUAN	Industry	S&P 500
Price to Enterprise	2	22.72	17.80

Based on the 2X price to enterprise metric, Duoyuan Global Water is currently receiving an average earning estimate of $1.49. If they achieved the lower, more conservative, S&P 500 average of 17.80 times the $1.49 estimate, it would equate to a $26.52 plus the cash of $6.28 giving it a stock market value of $32.8 or over three times the current market value.

2. Sales Benchmark Review

Price to Sales

.51

4.70

n/a

Based on revenue models, knowing Duoyuan Global Water stock price is about 66% cash, the underlying enterprise value disparity between them and their bench marked peers is materially significant. Comparing Duoyuan Global Water to their peers in the pollution control industry for sales values, assuming they will achieve about $151.34 million in revenues which is the consensus analyst estimate, one arrives at a per share value of $28.90 (their current estimate for 2010 times the industry quoted peer, price to sales for the industry) — plus the $6.28 cash meaning a combined value of $ 35.18.

3. Profit Growth

Earnings Comparison to Industry
Time	02/2009	02/2010	Next 5 years
DOUYUAN GLOBAL WATER	61.40 %	12.10 %	20.00 %
POLLUTION CONTROL	17.00 %	17.90 %	17.20 %
S&P 500	46.80 %	11.00 %	- %

souce Zacks Research

Duoyuan Global Water has out preformed in profits last year against both their pollution control peers and the S & P 500 and is forecasted to grow at an annual rate of twenty percent. This is a higher projected growth rate than their competitors coupled with a conservative balance sheet. Duoyuan Global Water could and possibly should attain a stock value premium to their slower growing peers.
Addition Duoyuan Global Water information such as Financial ratios, charts and news are available here.

Conclusion

We believe that Duoyuan Global Water’s enterprise is trading at about a 70% discount to many of their peers and well below most companies in the in the pollution control industry. It is even trading at a lower value than Chinese based companies who have recently been exposed to having accounting irregularities. We find their valuation surprisingly low, especially considering that they have consistently out preformed their peers in this superior business environment and a major CPA firm giving them the O.K. on their accounting along with proving high level of Quality Certification such as SO9001 verification. This, coupled with the established solid business franchise that the average forecast is that Duoyuan Global Water will out grow their peers over time, is why we have included Duoyuan Global Water in our High Cash Stock Review.

Disclosure

Durig Capital owns Duoyuan Global Water (DGW) for itself, clients and related client accounts.

Sincerely,

Randy Durig

Financial Investment Advisor
DIR 971-732-5119

A+ Rating
with the BBB!

Durig.com | Investment-Income.net

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TravelCenters of America LLC (TA) High Cash Stock Review

Randy — Sun, 03 Apr 2011 23:42:16 +0000

By Randy Durig CEO of Durig Capital

TravelCenters of America LLC (TA)
Per share values on 2-14-2011:
Market value $ 7.02
Cash $ 1.44
Real Estate $ 4.80
Equity value $5.58

TravelCenters of America (AMEX: TA) is the one of the nations largest full service travel centers serving professional drivers and every day motorists alike. Their mission is to take care of all highway travelers in the finest full-service facilities while on the road and they have been doing this for over 30 years.

We selected TravelCenters of America because it is one of the select few that fit our model. Our goal is to select, purchase and continually monitor companies in an effort to obtain outstanding performing investments while minimizing risk by finding low values for our clients. We will cover part of our review and selection process as well as explain why TravelCenters of America has recently been included in our High Cash Stock Review portfolio.

Introduction

TravelCenters of America is one of two major fuel services firms in America. In June 2010, two major competitors, Pilot Travel Centers and Flying J merged becoming the Pilot Flying J. The Flying J was Valued at $1.8 billion in bankruptcy. When Pilot took over the Flying J and merged the two companies they repaid $1.4 billion of outstanding debt and kept the 224 server centers. This merger greatly reduces the overall competition and according to the FTC, the merger will “likely result in higher diesel fuel prices for long-haul trucking fleets.” The reduction of competition within the industry may also help increase the margins at TravelCenters of America.

TravelCenters of America has a strong balance sheet and has outstanding operation leverage which may possibly be even greater than Adam’s Resources whose equity has performed well since included in our Investment with Income portfolio. We have been following TravelCenters of America for a while knowing the lease from their parent was financially prohibitive thus penalizing their market valuation. A new leasing agreement was recently reached with the owners of the property, Hospitality Property Trust (HPT), after some drawn out negotiations. With the new contract saving $42 million dollars and finally appearing to be agreed upon at arms length, this should allow for better execution of the business profit wise. TravelCenter of America’s operational business moving forward should be the barometer of their value. They were valued bellow and now near liquidation values due to the strangle hold the former long term lease had on the income statement.

With the cash flow from operations generated over the quarters and the renewed savings from the new lease agreement, based on bench marking against their peers, we believe TravelCenters of America still is currently valued at very distressed valuation.

Step 1 – We first search for companies with pristine balance sheets.

TravelCenters of America has $125 million in cash and $100 million in debt on the books meaning each share has a cash value, after paying off debt, of $1.44. They have $5.9 billion or $330 per share in sales per year with a meager $102 million ($ 5.58 per share) enterprise value. This is stronger than most company’s balance sheets but sets a new low for our review. TravelCenter tremendous operational leverage and one example is their price to gross profit, is better than many competitors price to sales.

Step 2 – We like extremely low values.

After reviewing hundreds of companies for value, if not thousands, TravelCenters of America, even after a very large move, is still one of the lower valued companies that we could identify. The enterprise value per share is only $5.58. During the last year, sales increase to $5.9 billion from $4.7 billion or 27% compared to the year prior.

The operational business could be categorized for simplicity sake into two segments—petrol sales and in store sales. Profit margins of each category are drastically different as petrol or fuel is very low and in store sales are quite large.

1. TravelCenters of America in store sales increased 5.5% to $1.15 billion with cost of goods sold being $488 million thus generating a profit margin of 58% and or operational profits from in store sales of $662 million on sales four times larger than in store sales.
2. Petrol sales were about $4.75 billion with cost of goods sold about $4.42 billion. The operating profits from petrol sales were half, $328 million.

2010	Sales	Cost of goods sold	Gross profit	Gross margin	% of sales
Petrol	$4.75 billion	$4.42 billion	$328 million	7%	80.5%
In Store	$1.15 billion	$488 million	$662 million	58%	19.5%
Total	$5.90 billion	$4.908 billion	$990 million	16.7%	100%

Since the in stores sales have higher margin compared the petrol sales margins as seen above, we felt the best benchmark for TravelCenters of America may be gross income which were $990 million last year. If you value them at 2.1 time gross income, a level that many retail companies achieve, TravelCenters of America could be worth about $120 per share on an operational level. This does not include cash on hand, rental income, or real estate. It appears that the over sized lease payments of the past have hidden the value derived from their incredible size and leverage.

If you compare just TravelCenters of America (no fuel or rental income) in store sales to other stores with similar merchandise most stores have a 40% gross profit margin. In store sales peers average $0.85 in equity value for every $1 of sales. If TravelCenters of America were valued based solely on it’s in stores sales benchmarked against their peers, the store’s equity value could achieve around $56 value.

Hidden value

TravelCenter of America has real estate on the books of around $3.50 per share. Even though the combined real estate book values might be on the high side, knowing it was acquired in 2007, it should have some real value. They own a 40% equity minority investment in a joint venture in Petro Travel Plaza with a book value of $17.5 million. That works out be about $1.01 per share of hidden value. TravelCenter of America invested $5.2 million in Affiliates Insurance Company or about $0.29 per share. In total, the real estate and the joint venture should represent a value of about $4.80 per share.

Item	Value per share
Property on Books	$ 3.50
40% Minority Interest	$1.01
Affiliates Insurance	$0.29
Total	$ 4.80

TravelCenter of America currently has about $105 million worth of unrestricted federal loss carry forward. This could allow them to run a profitable operation without paying federal taxes for at least a couple of years. This could boost after tax earning per share going forward. Simply put the next $6.00 of profit per share should have very little if any tax drag.

Step 3 – Is the operation or enterprise driving value to their shareholders?

TravelCenter of America has been generating a high level of free cash flow for the last year due largely to the fact that it was not paying for complete lease that were recently adjusted downward. This represents a free cash flow return from enterprise of $1.63 share for the 2010 year. The last 12 months of free cash is rough equal to 29 % of the entire enterprise. It is impressive when the free cash also covers some of the cost of raw property, which even though has value, might reduce cash flow for items like taxes. The cash flow from the enterprise minus the book value of the real estate shows that there is over an 100% return on the enterprise which is about the same Universal Insurance article.

The red line – Since the beginning of 2nd quarter 2009 sales (revenues) have increased.
The dark blue field- The value of the underlying stock

No wonder once the leasing issues were cleared up that TravelCenters of America attained a much higher value and the stock appreciated dramatically. TravelCenters of America still has one of the best values we could identify, based on almost $6 billion in sales and about $100 million in enterprise value. The $100 million in enterprise value carry on the books almost $ 80 million in hidden value. If you subtract that the hidden value the $6 billion operation could have only a $13 million enterprise valuation. Having a $13 million equity (minus hidden value) that produces a gross income of $990 million is greatly distressed.

If one takes into account the $42 million annualized in lease saving, this should translate into about $0.60 per share each quarter, or $2.42 annually. Since their should be no additional costs and taxes should be at worst minor, the lease reduction should flow directly to the bottom line increasing earning per share by about $2.42 annually.

That combined $42 million in lease expense savings with real and measurable operation sales and improvements, the 2011 bottom line, over the prior year’s bottom line, may be robust.

Step 4 – Is this a good business?

This is a very good business. There are few national competitors servicing professional drivers. With many barriers to entry, few new companies will appear as major competition. If TravelCenters of America utilizes its economy of scale, it may actually gain market share by eroding competition from smaller firm. Fuel and in store sales are a very repeatable business and almost annuitized. The combination of very high barriers to entry and repeatable business should help drive the value higher. The largest negative to the business is the very narrow margins on petrol sales and with the consolidation in the industry, these may start to widen.

Step 5 – Is the Train Wreck and then the fog from the Wreck clearing?

With a negative or in this case low enterprise, often a “Train Wreck” is needed to drive value close to cash. We’ve identified three major issues and risk that has kept the value so low:

1. High Rent

2. Third Party control

3. Law suits

High Rent

TravelCenter of America recently changed their lease terms with the owners, Hospitality Properties Trust (HPT), reducing annual payments by $42 million per year. Even though this still might not be market value, it should be enough to increase profits by about $2.42 per year per share. Knowing that the retail convenient store peer group receives about 18x PE valuation, the $2.42 improvement per share means the equity may increase by $43 per share. Since TravelCenters of America has negative profits, the calculation isn’t material but helps explain why on the lease news it moved from $4 to $7 dollars per share immediately.

Third Party Control

TravelCenters of America’s board of directors and top management have come from and are still related to Hospitality Properties Trust. The successful lease reduction was driven by outside shareholder lawsuits. A properly run board of directors should act as fiduciaries. The board should have spotted this and thus not had it brought to light by outside share holder. The board of directors must be able to make decisions that are best for TravelCenters of America shareholders and not for their related firms, friends and family. Even though the negotiations were successfully for shareholders, the company may be seen as having a higher risk due to the board of directors conflicting interests.

We believe TravelCenters of America and also Hospitality Properties are subject to additional lawsuits until both boards can truly fulfill their mandated fiduciary duties. Since these are significantly related industries due to the property leases, stock ownership, and shared top management, both the cronyism and the associated liability from failing to provide the required corporate governments such as

1. Mitigating conflicts of interest between manager and shareholders and directors and share holders.

2. Insure assets are used to the benefit of investors and stake holders.
This truly invites substantial additional ongoing litigation risk until they can provide fiduciary corporate governance with proper structures that without question put their share holders and investors first. .

Lawsuits (environmental)

TravelCenters of America has several environmental lawsuits dealing with regulations relating to management of underground storage tanks. In today’s world, this appears to be an industry wide ongoing event.

In Summary

If TravelCenter of America could increase their margins by just 2% with similar revenues, this would translate into an increase in net income of almost $7 dollars per share and knowing currently convince stores in the industry are price at 18x PE this could equal to a hypothetical improvement of $126 per share. This huge operational leverage and the hidden value as described above has put TravelCenters of America in our sweet spot of greatly distress value with possibly large profitability improvements. We enjoy owning highly distressed valued companies that can provide outstanding profit growth that are deeply distressed and that are why TravelCenter of America fit our model.

We believe that TravelCenter of America is trading over a 90% discount to many of their peers and well below most companies in the in the convenient store industry. We find TravelCenters of America is looking forward to a greatly improve year, combined with their discounted value and huge leverage, we are including them into Durig Capital’s High Cash Stock Review portfolio.

Disclosure Durig Capital owns TravelCenters of America for itself, clients and related client accounts.

Sincerely,

Randy Durig

Financial Investment Advisor
DIR 971-732-5119

A+ Rating
with the BBB!

Durig.com | Investment-Income.net

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Fourth Quarter 2010 Prefomance update: High Cash Stock Review

Randy — Sun, 03 Apr 2011 22:09:53 +0000

Low Enterprise Value Stocks: Rewarding prudent investors

The second half of 2010 was surprisingly quite rewarding. Utilizing our selection criteria, our average stock performance for the High Cash Stock Review that was published was up over 37% percent compared to the S & P 500’s very respectable 20.82%.

In the fourth quarter, the High Cash Stock review was up a strong 20.38% percent compared to the S&P 500’s gains of 9.92%.

Our third quarter 2010 performance was rewarding with a 16.68% compared to the S & P 500’s 10.62%..

The High Cash Stock Review portfolio is based on very low or negative enterprise values while still including our established criteria of strong increases in cash flow, earning, and a qualitative review to ensure it is a good business model. The goals are to select, purchase, monitor, and sell companies in an effort to obtain outstanding performing investments while minimizing risk by finding low values for our clients.

The second half of 2010 based on simple math is:
Time High Cash Stock Review. S& P 500
Fourth Quarter 2010 20.38 % 9.92 %

Company	Fourth Quarter 2010
China Yuchai International Limited (CYD)	63.14 %
Homeowners Choice, Inc. (HCII)	* 29.69 %
KHD Humbolt Wedag International AG (KHDHF.PK)	22.76 %
O2Micro International Ltd. (OIIM)	(- 1.44) %
The Bancorp Inc. (TBBK)	44.02 %
Tollgrade Communications Inc. (TLGD)	28.10 %
Tessera Technologies Inc. (TSRA)	19.55 %
Silicon Graphics International Corp (SGI)	11.21 %
Sonus Networks, Inc. (SONS)	(-27.76) %
Terra Nova Royalty Corporation (TTT)	*14.61 %

*Dividends not included

Understanding that the very low values may provide protection from a market sell off, positive earning, cash flow providing profit increase, possible stock price expansion helping to increase the often very low values, and above all a exit strategy, we believed this approach is uniquely special. So far, it has done exceedingly well and beyond our in house forecast by such a wide margin, that we are very excited to help others but one must realize that this is a short indicator of performance and their is no guarantee of future success.

The High Cash Stock review appears to mirror the performance of the Income and Investment review (which has the same investment criteria while requiring a dividend payment.) This portfolio returned a whopping 28% in the fourth quarter and this is not including the 4% annualized dividend yield.

Updated portfolio review:

Lojack (LOJN) was added to our clients portfolio along with this published review during the fourth quarter. Even though LoJack provided about a 40% whopping gain in stock value since our article, yet we have not included it in the overall performance since it was not included in the portfolio for the entire time period of the quarter.

Openwave (OPWV) was also added to the portfolio with this published review in the fourth quarter. Openwave also provided a nice improvement for our clients but was not included in our performance numbers since it too was not in for the entire quarter.

Surprising the returns were very similar to our dividend based Investment with Income portfolio that was up over 22% in the 4 Quarter 2010.

No positions were sold during the quarter.

Disclosure: Both Durig Capital and its clients have positions in all the above positions.

Performance is bases on a written reports published as
1) High Cash Stock Review or
2) Income and Investment Portfolio.

These both are hypothetical portfolio illustration and no money was invested by clients or Durig Capital in this enclosed published manner. Hypothetical only takes into consideration all High Stock Reviews or Investment and Income stock position that were written and publicly published plus held for the entire quarter. Any new position or liquidate position that occurred in the published quarter were not included in the performance. This assumes all positions have an equal investment value at the beginning of each quarter. This is purely a hypothetical account and actual performance of individual active accounts have preformed both above and below the hypothetical returns in the past and most probably will in the future. Past returns are no way indicative of any guarantee of any possible future return. Individual suitability and advice should be sought about any particularly matter or circumstance.

Sincerely,

Randy Durig

Financial Investment Advisor
DIR 971-732-5119

A+ Rating
with the BBB!

Durig.com | Investment-Income.net

Related Articles:

Durig Capital News:

Openwave (OPWV) High Cash Stock Review

Randy — Sun, 03 Apr 2011 02:12:39 +0000

Openwave
By Randy Durig CEO of Durig Capital

Openwave (OPWV)
Per share values on 11-12-2010:
Market value $2.06
Cash $1.40
Equity value $0.66

Openwave Systems Inc. (Nasdaq: OPWV) is a global software innovator delivering context-aware mediation and messaging solutions that enable communication service providers and the broader ecosystem to create and deliver smarter services.

We selected Openwave because it is one of the select few that fits our model. Our goal is to select, purchase and continually monitor companies in an effort to obtain outstanding performing investments while minimizing risk by finding low values for our clients. We will cover part of our review and selection process as well as explain why Openwave has currently become one of our selections.

Introduction

Openwave has been seen as an innovator in the mobile digital revolution. They are creating a diversified product line, with solid quarterly execution. With their main Intergra platform product line, the Sprint browser applications and licensing revenues, they created additional strong probabilities of developing an ongoing successful business.

Openwave has a strong balance sheet, delivered a strong quarter and has the potential to be extremely well positioned in several desirable, basically monopolistic industries. If either of their two new products are successful, or their core continues to accelerate, they could attain higher bands of valuation. Currently, Openwave has a very low valuation for its enterprise value. Along with a strong quarter in sales and two new product segment introductions, they also competed the best booking quarter since the seasonally strong calender 4th quarter.

Step 1 – We first search for companies with pristine balance sheets.

Openwave has $117.5 million in cash meaning each share a cash value of $1.40. They have over $160 million in sales, with only a $55.5 million ($0.66 per share) enterprise value. This is an strong balance sheet and $0.66 per share is a very low value for an entire enterprise that is greatly increasing its strategic position in the software industry.

Step 2 – We like extremely low values.

Openwave is one of the lower valued companies that we have identified. The enterprise value per share is only $0.66. Sales last quarter were $41.5 million. The last 4 quarters (annual) of sales were $174 million giving Openwave a price to sales value of the enterprise of only $0.31 per share. Last quarter sales of $41.5 was just under the entire enterprise value of $55.5 million. These are extremely low valuations for a high margin software company.

Step 3 – Is the operation or enterprise driving value to their shareholders?

Openwave has three separate models of growth, two of which were introduced this past quarter. Individually, each could be consider a very high valuation models if successful. Properly executed over time, they could bring a superior benchmark valuation to their shareholders instead of their current depressed values.

Intergra

Openwave provided a very strong quarter. They are starting to see solid and improving traction in their Intergra media business line. They are making an effort of bring testing to their clients in an effort to provide them with hard proven facts that Openwave solutions could truly be beneficial.

They have 34 trials planed and/or completed with 50% of the trials by new prospective clients. Trials are periods where Openwave allows potential clients to utilize their products on a “try out” basis much like the local paper does by enticing customers to purchase a subscription with a free Sunday paper on occasion. Openwave projects they will achieve in the range of 25% to 33% close rate on their trial clients. They have already disclosed they have closed three Intregra media solutions with one already occurring this quarter.

Browser Application

Currently, we see this as a home run opportunity. The probability of them succeeding in this market is still considered a long shot. In our valuation modeling, adding a product with home run potential to the established core product line is significantly better than last quarter, when they browser application wasn’t a publicly disclosed concept. If Openwave could become the dominate software based application provider, while developing an application ecosystem utilizing numerous carriers, this could have the potential to be the home run. Companies that have achieved critical mass and leveraged a monopoly positions, have turned into great investments in most cases.
The browser application is based on the above Intergra platform, which Sprint (S) is using to deploy a new ecosystem of enhanced services within the Integra browser. This would make Sprint the first operator globally to announce a browser-based value-added ecosystem. Leading off with a company like Sprint and have an open based architecture allowing applications from many services to be utilized by open carriers, is nice for Openwave. This model provides higher revenues and controls along with additional benefits to the carrier or in this case the phone company. In the application world, Andriod has over an 100,000 application lead in this monopolist unit market. For Openwave, the biggest issues is gaining critical mass of both carries and applications. This will truly be challenging for a smaller company such as Openwave. Let us hope that all of the 27 Intregra platform clients (the last number disclosed) see the additional benefits of adding the browser application to their existing platform as a win-win and with an additional low cost revenue source.
The carries would love to have applications built into their software, where they would have control and coordination instead of being dictated in applications by a third party like Apple (AAPL) or Google (GOOG). Openwave and Sprint are selling the advantages of their newly combined ecosystem to both software application developers, and possibly more important, other carriers. If this ecosystem became robust, it could catapult Openwave into a monopolist business position possibly having the stock valued at the high end to its bench-marked peers.
Licencing Revenue

Like the Intrgra and browser application, the licencing segment showed solid execution this last quarter. Openwave has about 150 patents and they claim they have foundational patents for the entire mobile Internet. Many have credited Openwave with pioneering the Handheld Device Markup Language (HDML) along with creating the first working phone based browser. Openwave and their legal team believe their foundation position could cover ALL mobile Internet devices which is a very large and growing market, including possible components of successful products like Apple’s iPhone, Google’s Android and Research In Motion’s Blackberry.

With that said, they have had only one proven licencing success with a small company (Mobixell/724) and one company does not produce a trend. If their patents prove to be foundational to the mobile internet, then just their patent portfolio alone could be valued many times larger than their entire current market capitulation.

They have about 10 years remaining on their foundational patents and the licensing market has been quite successfully for those who have executed well. We reviewed a little but highly profitable licensing company called Tessera (TSRA) just a little over 2 months ago and it is up about 40% since our recommendation.
Step 4 – Is this a good business?

This is a very valuable and possibly a monopolistic business model. There are very large barriers to entry albeit numerous global competitors. The ability to design, build and sell infrastructure software to the carries around the world in which their networks become dependant on those functions is a great business. There are few markets with the growth prospects and potential greater that what the wireless mobile market provide. The main issues is Openwave’s ability to execute and that ability has been flawed with past management.
Step 5 – Is the Train Wreck and then the fog from the Wreck clearing?
When finding companies with a negative or in this case low enterprise, often a “Train Wreck” is needed to drive value close to cash. We’ve identified three major issues that has kept the value so low:
1. Reliance on core vendors

2. Previous management

3 . Employees are using the stock option program as a cash machine.
Reliance on core vendors
Openwave has relied heavily on Sprint and AT&T as clients in recent quarters with each representing a large source of revenue in the past. The risk can be seen in last quarters results as AT&T declined to only 4% of revenues causing a negative material effect to earnings. With Sprint still representing 21% of revenues, any significant decline in sales to Sprint would be difficult to absorb. This appears to be the case with the AT&T decline.

Management
After having a revolving door at top management, Openwave has had a single recognized leader in Mr. Ken Denman, Chief Executive Officer, since November 2008. The business plan Mr. Denman has utilized was in place before he attained the CEO position and this quarter showed signs of real execution, increase product sales, pipeline and backlog. Our contacts from the firm say the working conditions at Openwave are significantly better than what they were in the past.
Some of the major mistakes that Openwave’s past management made were:

They had a hostile takeover attempt that cause a out right fight for control and this caused an implosion of the ongoing business. With the new and established management working in sync with it’s shareholder, Openwave could possibly have similar success to another company that had a internal company issues that we follow. Since identifying and recommending on out Tollgrade (TLGD) review with a similar issue, the company is up about 25% since our August review. This helps to indicate that having share holders and management working together could help the returns for the stock.
In January 2006, Openwave closed the $120 million acquisition of Musiwave, a French music application services provider for mobile phones. Less than two years later, Musiwave was sold to Microsft (MSFT) for $46 million. This single loss caused by the buy and sell of a division cost them more than Openwave’s current entire enterprise value.
Due to the past real estate lease deals signed at the peak of the market, about $12 million in annual cash flow is being lost. These annual cost will terminate in 2013. This mistake by past management is costing the company shareholders about $0.14 a share annually. When these leases terminate, it will provide an additional 20% cash flow increase to the enterprise.

Employees stock options
Openwave still might have the worst stock option program that we have reviewed. They are diluting the shares by giving low priced options to employees. Yet the insiders with incentives, still only hold less than 1% of the entire company. If the employees, that are involved in the day-to-day management, have no interest in buying and retaining shares at significantly lower prices, then why does management believe investors should take the risk that management has divorced itself from?
Our Adams Resources (AE) review, found a company that has no share holder plan and has attained a whopping 50% insiders involvement, demonstrated a great return just after our published review. Why should share holders pay for a program that is providing a outright cost plus stock dilution, with no accountability or alignment with shareholders goals.
In Summary
We enjoy companies that can provide outstanding short term execution — turning weaknesses into real strengths, limited growth prospects into stronger multi positioned companies with possibly a superior business model driving their future success. We believe Opernwave has value, execution and a balance sheet that fits our our model, and we’re optimistic that Opernwave will outperform their higher valued peers.

Valuation Ratios

Company

Industry

S&P 500

Price to Sales

0.41

3.29

n/a

1. Revenue Base
Based on revenue models, knowing Openwave stock price is based with about 65% cash. The underlying enterprise value disparity between Openwave and their bench marked peers is materially significant. If you want to compare Openwave to its peers in sales values, assuming Openwave will achieve about $160 million in revenues, you get a per share value of $6.26 (their current run rate times the industry quoted peer, price to sales for the industry) — plus the $1.40 of cash, you get a combined value of $7.66. If Openwave executed on the newer higher monopoly or licensing models, the price to sale level would be possibly double the industry benchmarks.
2. Return on Buyout.

Since past buyouts have been able to strip out the cash, as occurred creating our very high return for DivX merger since our recent review, Openwave could be a target. Most technology companies are trying to enter the wireless mobility world due to the potential growth. Since the enterprise value of Openwave is so low, we believe it far more cost advantages to purchases an existing leading franchises then try to launch similar wireless software products platform. Since we have evidence of two possible buyouts in the past, and the very small management involvement in ownership. Openwave could possibly be a strong target form many firms.

We believe that Openwave enterprise is trading at about an 70% discount to many of its peers and well below most software companies in the wireless field. We find Openwave’s valuation surprisingly low, now especially with the belief that they have two additional revenue sources, each with the possibility of being a very large on their own. This coupled with the established solid business franchise, we find Openwave simply to be very undervalued at this time.

Disclosure
Durig Capital owns Openwave for itself, clients and related client accounts.

Sincerely,

Randy Durig

Financial Investment Advisor
DIR 971-732-5119

A+ Rating
with the BBB!

Durig.com | Investment-Income.net

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LoJack (LOJN) High Cash Stock Review

Randy — Sun, 03 Apr 2011 01:25:31 +0000

By Randy Durig CEO of Durig Capital

LoJack (LOJN) is the premier worldwide provider of tracking and recovery systems. More than two decades ago, LoJack created the stolen vehicle recovery category. Since then, it has earned a reputation as a proven global leader in the anti theft market.

We selected LoJack because it is one of the select few that fits our model. Our goal is to select, purchase and continually monitor companies in an effort to obtain outstanding performing investments while minimizing risk by finding low values for our clients. We will cover part of our review and selection process as well as explain why LoJack has currently become one of our selections.

Introduction

LoJack has been seen as an innovator in the car thief arena. They are creating a diversified product line, with this last quarter proving solid quarterly execution especially in cost controls and international sales.

LoJack has a strong balance sheet, delivered a strong quarter and has the potential to be extremely well positioned in several desirable, basically recurring revenue markets. With the cash flow from operations generated over the last four quarters and the renewed earning from this last third quarter, we forecast higher bands of valuation. Currently, LoJack has a very low valuation for its enterprise value. Due to ongoing strong quarterly international sales, a stable core market and a much lower costs, they competed the most profitable quarter since the Third Quarter of 2007, three years ago.

Step 1 – We first search for companies with pristine balance sheets.

LoJack has $37.5 million in cash and $8.1 million is dept, meaning each share has a cash value minus debt of $1.66. They have over $132.9 million in sales with only a $62.8 million ($ 3.37 per share) enterprise value. This is an strong balance sheet and $3.37 per share is a very low value for an entire enterprise that could earn in the $0.54 cent range annually.

It looks like cash is growing again.

Step 2 – We like extremely low values.

After reviewing hundreds of companies for value, if not thousands, LoJack is one of the lower valued companies that we can identify. The enterprise value per share is only $3.37. Sales last quarter were $38.5 million up from $36.1 million in the same quarter of the prior year. The last 4 quarters (annual) sales were $132.9 million giving LoJack a price to sales value of the enterprise of only $0.44 per share. Last quarter sales ($38.5 million) were more than half the entire enterprise value of $59.3 million. These are low valuations for a high margin often annualized company.

Hidden value

Upon our review, LoJack held a 12.5% equity investment with a value of $1.5 million, from a Mexican licensee, 5.5% equity investment with a value of $0.75 million, from a French licensee and 17.5% equity investment with a carrying value of $0.50 million, with an Benelux licensee. In addition, they hold less than a 10% equity interest in licensees in Argentina and Hong Kong, that we could not find any way to value.

Most international agreements provide that LoJack will supply components and products at prices to be determined from time to time and/or receive royalties based upon the licensees’ LoJack based revenue. Approximately 96% of international revenue was from the sale of LoJack Units during the year last year.

Step 3 – Is the operation or enterprise driving value to their shareholders?

LoJack has been generating a high level of free cash flow for the last 4 quarters (including the March 31 2010 loss) of $13.9 million. This is a free cash return of enterprise of 23.2% well below our jewel of a find in our review of Adams Resources (AE), but in the top tiers of companies we review. Using current quarter cash flow, based on it’s enterprise value gives a high 34 % return. We find it’s very hard to find in the current climate very few companies that can generate a close to 34% return in cash flow off it enterprise. The last quarter they generated a $0.16 profit with the average analyst estimates calling for a loss of $0.07. The very large and shockingly strong profit was attained mostly due to cost reductions, which LoJack believes also reduced the bureaucracies in their business making them more efficient and responsive to their clients. The companies quote

“Our aggressive steps to control expenses had a dramatic impact on our underlying cost structure and we are confident that our operating expenses are now at an appropriate level to allow us to invest in our business and drive profitable revenue growth in the future.”

Three Months Ended September 30, All figures in millions	2010*	2009
Revenue	$38.5	$36.1
Cost of goods sold	19.1	15.5
Gross profit	19.4	20.6
Costs and expenses:
Product development	1.2	1.9
Sales and marketing	6.9	8.7
General and administrative	6.6	10.6

* denoted quarterly data unaudited

The cost saving derived from product development, sales and marketing and general administration are $6.5 million quarterly. Annualized, that’s one significant reason why the turnround occurred. This remind us our success in our review of the Tollgate (TLGD) turnaround.

With the quarter completed, the average analyst estimate for calender year 2011 profits was raised from $0.32 cents to $0.54. Using the average analysts estimated earnings, the enterprise value is trading at just 6.24 times expected profits. Pretty low for a company that just produced it’s most profitable quarter in three years and significantly below it’s industry peers.
Please click the for a larger chart.

From the above chart.
Sock Market Value (Blue background) was above sales (Red Bar) prior to 2009.
Currently as revenues and profits (Green Bar) are growing sales are for less than the red bar.

Step 4 – Is this a good business?
.
This is a very good business. There are numerous competitors in the GPS world. LoJack has GPS based solutions but they have directly integrated with law enforcement systems and/or monitored exclusively by law enforcement agencies. This is the only company in the industry that we could identify which works directly with the police departments.

In the United States, their business advantage is:

The Federal Communications Commission granted for LoJack’s 2000 petition allowing the company to use the nationwide frequency, which previously was dedicated to stolen vehicle tracking, the diverse tracking and recovery of applications including missing people at risk, individuals of interest to law enforcement, loss for stolen cargo and hazardous materials. Now
LoJack is now working to extend integration with law enforcement into the many diverse applications.

Global sales were the significant driver of LoJack top line growth—-an amazing 53% increase in year over year sales growth. This growth is partially attributed to the increase in African Licensees sales growth of $7.4 million. The international market should be driver since they currently have franchises in only 31 countries.

In regions with high levels of crime, insurance companies offer clients discounts/incentives if anti theft devices are evident on the insured vehicle. Insurance companies in these higher risk markets have realized the value of the LoJack product line. In some markets, the insurance companies will only insure if the vehicle is equipped with LoJack. This mandate in regions like Africa and Latin America have been and could continue to be a tremendous advantage for LoJack. With a 90% average recovery rate Lojack could greatly reduce insurance companies risks.

Step 5 – Is the Train Wreck and then the fog from the Wreck clearing?

With a negative or in this case low enterprise, often a “Train Wreck” is needed to drive value close to cash. We’ve identified four major issues that has kept the value so low:

1. Management
2. Italy
3. Law suits
4 . Employees are using the stock option program as a cash machine.

Management

LoJack was very late to respond to the needed downsizing. Richard T Riley, who served as chairman and CEO from late 2006 through late 2008 and was reappointed early this year. The former CEO and Chairman of LoJack, Richard T Riley, who served from 2006 to 2008, was reappointed in May 2010.

Time will tell if bringing Mr. Riley back was correct but LoJack just completed the downsized with the goal of a very effected and systematic cuts in an effort to increase their company’s underling efficiencies. Those cuts appears to make the company profitable with enough internal cash flow to properly funded for growth their core enterprise. Even though their down sizing was late, it appear extremely effective.

Italy

LoJack has invested approximately $20 million in Italy to build out the LoJack network. This segment is still running at a operating losses. This represents about a third of their total enterprise value. We believe the Italian business is approaching a million dollar in revenues annually and growing nicely today but still will provide a dismal return if it’s ever materializes.

Lawsuits

LoJack appears be involved in a lot of lawsuits for a small company. With that said, we could not find a common theme or reason for the suits.

Employees stock options

Similar to many small companies, LoJack is diluting shares by giving low priced options to management and employees. Yet the insiders with incentives still only hold less than 6% of the entire company. If the employees, that are involved in the day-to-day management, have small interest in buying and retaining shares at significantly lower prices, then why does management believe investors should take the risk that management has little interest partaking? With that said, top management has had several open market purchases recently which is a answer positive indicator.

In our review of China Yuchai International (CYD), a company that has has attained a whopping 33% insiders involvement and demonstrated great returns just after our published review. Why should share holders pay for an employee options program that is providing a outright cost plus stock dilution, with little accountability or alignment with shareholders goals.

In Summary

We enjoy companies that can provide outstanding short term execution — turning weaknesses into real strengths, limited growth prospects into stronger multi positioned companies with possibly a superior business model driving their future success. We believe LoJack has value, execution and a balance sheet that fits our our model, and we’re optimistic that LoJack will outperform their higher valued peers. They have completed excellent quarters and have already attained growth of assets.

1. PE Benchmark Review

Valuation Ratios	Company	Industry	S&P 500
P/E Ratio	6.24	16.51	21.07

Based on the 6.24 price to enterprise, LoJack is currently reviewing plus cash based on the average earning estimate of $0.54. If LoJack received the industrial average of 16.51 times the $0.54 estimate, it would be $9.92 plus the cash of $1.66 giving it a value of $10.58 or over twice the current market value.

2. Sales Benchmark Review

Price to Sales

0.44

1.30

.93

Based on revenue models, knowing LoJack stock price is about 30% cash, the underlying enterprise value disparity between LoJack and their bench marked peers is materially significant. If you want to compare LoJack to its peers in sales values, assuming LoJack will achieve about $146 million in revenues the current analyst estimate, you get a per share value of $7.67 (their current run rate times the industry quoted peer, price to sales for the industry) — plus the $1.66 of cash, you get a combined value of $ 9.33.

3. Return on Buyout.

Since past buyouts have been able to strip out the cash, as occurred creating a outstanding return for DivX merger since our recent review, LoJack could be a target. Since the enterprise value of Lojack is so low, with 20-30% current enterprise returns, prior to any synergies created with the acquiring firm. We believe it far more cost advantageous to purchases an existing leading franchises then try to launch similar platform.(I.E. the very large cost for the Italian market launch). Since LoJack has a very small management team involvement in ownership, this helps us believe LoJack could possibly be a strong target for many firms.

Conclusion

We believe that LoJack enterprise is trading at about an 75% discount to many of it’s peers and well below most companies in the in the protection safety market. We find LoJack’s valuation surprisingly low, especially now. This coupled with the established solid business franchise, we find LoJack simply to be very undervalued at this time.

Disclosure
Durig Capital owns LoJack for itself, clients and related client accounts.

Sincerely,

Randy Durig

Financial Investment Advisor
DIR 971-732-5119

A+ Rating
with the BBB!

Durig.com | Investment-Income.net

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Is it Silicon Graphics International’s (SGI) time to shine?: High Cash Stock Review

Randy — Sat, 02 Apr 2011 21:59:19 +0000

Is it Silicon Graphics International’s (SGI) time to shine?

Is SGI’s third time a charm? Now that they have rock solid balance sheet, excellent execution and very low enterprise value, is this SGI’s time to shine?

We like SGI because it fits our model! Our goal is to select, purchase and monitor companies in an effort of gaining outstanding performing investments while minimizing risk for our clients. We will cover part of our review and selection process as well as explain why SGI has currently become one of our selections.

First, you should know the following: On April 1, 2009, SGI filed for Chapter 11, again, and announced that it sold all of its assets to Rackable Systems for $25 million. The sale increased to $42.5 million and was finalized on May 11, 2009. At the same time, Rackable announced their name change, Silicon Graphics International, as their global name and brand.

Step 1 – We first search for companies with pristine balance sheets.

After the purchase and name change, the new SGI has roughly $154.8 million in cash, or $5.10 per share, and no long term debt after completion of the December quarter. SGI has a very strong balance sheet.

Step 2 – We like extremely low enterprise values.

When you subtract out the cash from the enterprise while remembering that SGI has no debt, their enterprise value (the value of the ongoing operations of the company) is actually extremely small for a company that just completed a single quarter with over $150 million in pro forma revenues.

If you subtract out all the cash from the remaining value of the company, the ongoing business is only worth about $218 million. This makes the business value smaller than the just completed quarterly revenues, which is remarkably low for a leading computer company with a run rate well above $500 million in revenues. SGI is achieving size, scale and many competitive advantages while only having a handful of competitors. Additionally, having an impressive ability to leverage new business revenues in both storage and services while attaching more value onto to their established and strong position in server sales, they have a nice business model.

Step 3 – Is the operation or enterprise driving value to their shareholders?

SGI receives another yes. They had an outstanding quarter with a 18 cent pro forma profit, which is well above the average estimate of a loss of 8 cents while solidly expanding and, better yet, forecasting a continuously expanding margin for the year. Possibly even more impressive is that SGI grew their cash this quarter by over $31 million, which was a whopping 25% greater over their last quarter.

An impressive metric measurement of their execution was that the new SGI’s international revenues are up about 12 times in one year to 29% of total revenues. With this knowledge and the history of SGI, the new SGI has strong execution and growth.

Now knowing the excellent performance on the international markets, SGI’s current forecast of doubling storage business in three years to 30% of total revenues seems very palatable. In most companies this would be seen as a Hercules-type of event, especially in this economy; For SGI, though, it’s just part of normal execution.

Step 4 – Is this a good business?

We believe this is a very good business with both new and established clients adopting a slow but steady migration to a cloud-computing concept of computing, while at the same time the cost of high performance computers is rapidly falling. This allows for a high growth, low cost, open-architecture computer company to be in a very enviable position. SGI is a leading developer of enterprise-class, high performance systems that feature individual configurations that could include thousands of Intel x64 based microprocessors with Linux operating systems. The standard combination of Intel x64 architecture and Linux operating environment combined with their own differentiated Linux extensions gives companies that purchase SGI advantages in improved performance, simplified system management, reduced operating cost and a much more robust development environment.

When Rackable purchased the assets of SGI, they also attained over 700 patents in the high performance computers as well as many large customers.

Step 5 – Is the Train Wreck and then the fog from the Wreck clearing?

When finding companies around cash value, often a “Train Wreck” is needed to drive value close to cash. With SGI, it was assumed it was a never ending train wreck, but some of the major concerns include:

Questionable success of two uniquely different companies merging, knowing the more established one never gained success in years.
SGI’s history of having great technology, but poor sales or execution.
Questioning if Rackable would be able to provide it’s high growth, while accruing a much larger company.
In 2006 and 2009, SGI went into bankruptcy giving SGI without proper due diligence – the concept that SGI is a perennial looser.

I believe all of these factors and more have been priced into this company’s current price. First of all, SGI will survive if it’s profitable with a high pile of cash and no debt.

Rackable Systems (the purchasing company) had a completely different story and went public in June, 2005. According to Gartner’s October 2007 server report, Rackable Systems was the fourth largest x86 server provider in North America. Also, in 2007, it was rated the fastest growing server provider in North America, outgrowing all the majors like Sun Microsystem, Dell, Hewlett Packard and IBM on a unit percentage basis. With Rackable Systems (the little guy) purchasing SGI (a technology leader), this could come out far better than it has been priced for.

The new SGI has now demonstrated over the last two quarters that the execution of Rackable Systems combined with the technological muscle of SGI to date has been a wonderful marriage, with some of the best execution in the business whether we perceive them having a low enterprise value or not.

In Summary

We believe SGI has a value, execution and balance sheet like those past companies that fit our model, e.g., SONS, LAB, DIVX, KHD, HCII and WCG, so we’re hopeful that SGI will have a similar outcome knowing other companies that fit this model have preformed well. Knowing that SGI has completed two excellent quarters in creating value for their shareholders and now that the new company has completed over 6 months of history, we ran the following two traditional valuations of SGI to put a value on the new company:

1. Price Earning or PE Based:

Durig Capital is currently forecasting that SGI will produce an annual run rate of 72 cents per year pro forma. With SGI’s margins, revenues and profits all expanding, SGI should at least achieve some industry parity in value. When the Diversified Computer Industry’s average PE of $17.55 is applied to SGI, this would give ongoing business a value of $12.63. Then, when you add the cash of $5.10 per share, we believe that SGI could achieve a stock market value of $17.73.

2. Revenue Based:

If you value SGI at 2.48 times sales (again, the computer diversified sales average) using SGI’s guidance of $500 million in sales for their current year plus the $5.10 in cash currently on the books, it adds up to a $46.50 stock market value.

Either way, today you could easily demonstrate based even on the lowest result (the PE based valuation) that with SGI’s current model, low valuation and especially with their short term superb execution, SGI could and should, in our opinion, be valued significantly higher.

Disclosure

It appears the top management is fairly compensated.

Durig Capital owns SGI in it’s client’s, related and own accounts. We started buying around $8.89 per share.

Sincerely,

Randy Durig

Financial Investment Advisor
DIR 971-732-5119

A+ Rating
with the BBB!

Durig.com | Investment-Income.net

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Seagate News:

Financial Ratios

Updated 3 February 2010.

Dividend	SGI	Industry	Sector	S&P 500
Dividend Yield	N/A	0.68	1.78	2.48
Dividend Yield – 5 Year Avg.	0.00	0.27	0.93	2.03
Payout Ratio (TTM)	N/A	3.37	13.00	31.17

Efficiency	SGI	Industry	Sector	S&P 500
Revenue to Employee (TTM)	928,240.60	954,308.14	522,758.26	776,721.49
Net Income to Employee (TTM)	-172,250.00	162,153.43	104,838.41	92,672.95
Receivable Turnover (TTM)	5.66	9.15	8.08	10.56
Inventory Turnover (TTM)	3.67	45.22	17.32	11.31
Asset Turnover (TTM)	0.77	1.12	0.70	0.88

Management metrics	SGI	Industry	Sector	S&P
% Return on Asset (TTM)	-14.30	13.21	9.53	7.00
% Return on Asset – 5 Year Avg.	-9.21	12.15	10.86	8.66
% Return on Investment (TTM)	-21.23	22.39	13.71	9.93
% Return on Investment – 5 Year Avg.	-12.01	20.74	16.54	12.44
% Return on Equity (TTM)	-26.80	26.38	21.50	17.48
% Return on Equity – 5 Year Avg.	-15.18	24.96	20.94	20.35

Share-related	SGI	Industry	Sector	S&P
Market Cap	N/A	10,294M	1,680M	20,000M
Beta	1.49	1.37	1.18	1.00

Valuation	SGI	Industry	Sector	S&P 500
P/E Ratio (TTM)	N/A	17.55	23.28	19.81
P/E High – Last 5 Years	N/A	57.13	38.83	31.29
P/E Low – Last 5 Years	N/A	11.10	11.89	10.60
Price to Tangible Book (MRQ)	1.69	N/A	N/A	N/A
Price to Book (MRQ)	1.52	4.08	4.04	3.38
Price to Sales (TTM)	0.92	2.48	3.66	2.30
Price to Cash Flow (TTM)	N/A	14.12	18.04	13.72
Price to Free Cash Flow (TTM)	N/A	14.45	18.05	21.58
% Owned Institutions	69.02	N/A	N/A	N/A

Profitability	SGI	Industry	Sector	S&P 500
% Gross Margin (TTM)	16.44	33.84	54.40	46.17
% Gross Margin – 5 Year Average	17.45	28.62	53.11	45.63
% EBITD Margin (TTM)	-16.64	21.13	23.08	22.50
% EBITD Margin – 5 Year Average	-0.76	14.04	20.30	23.15
% Operating Margin (TTM)	-21.02	18.54	18.40	16.68
% Operating Margin – 5 Year Average	-2.61	12.80	17.52	18.83
% Pre-Tax Margin (TTM)	-20.82	18.54	19.18	15.49
% Pre-Tax Margin – 5 Year Average	-5.41	13.74	16.72	17.79
% Net Profit Margin (TTM)	-18.56	13.08	13.86	10.56
% Net Profit Margin – 5 Year Average	-8.25	9.80	10.48	12.45
% Effective Tax Rate (TTM)	N/A	26.39	25.44	28.98
% Effective Tax Rate – 5 Year Average	N/A	26.57	24.54	30.10
% Return on Equity (TTM)	-26.80	26.38	21.50	17.48
% Interest Coverage (TTM)	N/A	11.98	10.11	12.12

Financial strength	SGI	Industry	Sector	S&P 500
Quick ratio (MRQ)	1.35	1.62	2.41	1.44
Current ratio (MRQ)	1.77	1.97	2.82	2.01
Long term debt to equity (MRQ)	0.00	17.80	30.70	69.10
Total debt to equity (MRQ)	0.00	19.90	35.50	75.90

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