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Microwave Filter Co. Inc (MFCO) - A pink sheet nano-cap with undervalued assets

8/24/2019

21 Comments

 
Picture

I came across Microwave Filter Co. Inc (MFCO) whilst trawling through the pink-sheets and decided to take a closer inspection after a few things caught my eye.
 Regular readers will know what I look for but for those who are new to the blog I'll fill you in.

Ideally  I'm looking for tiny, illiquid, unloved or forgotten companies which have been around for a while and  have some potential, invariably they also tend to have some hair on them.

MFCO checks all the boxes;

The company formed in 1967 and lists it's business as follows;


"Microwave Filter Co., Inc. manufactures, and sells electronic filters for radio and microwave frequencies. The filters process signals and prevent unwanted signals from disrupting operations. The Company serves cable television, wireless cable, broadcast, satellite broadcast, mobile radio, cellular telephone, commercial, and defense electronics markets."

If you think the business description sounds exciting wait till you get a load of their website, a relic from the land that time forgot! 



Here's a few numbers;

Market Cap =$1, 031,804
Share price = $0.40
Common =  2,579,238
​No warrants or Pref's

​And here's the long-range chart;

Picture

As you can see this stock tends to bounce around quite a bit.

The company is currently hovering around break-even  and has been losing money for the last few years.

The latest financials, 3rd Q 10-Q 2019       show;

Revenue for 9 months ending June 2019  as $2,746,029 with net income of $12,533 or $0.00 per share.
​
​The 2018 Annual report    listed the following;

Rev for 2017 and 2018 was  $3,036,669 and  $ 3,341,811 respectively. 

Net income for 2017 and 2018 was    -$264,216 and  -$16,059 respectively.



​Now to the things that interest me. We'll start with the balance sheet;​

Picture
Picture
Source: MFCO 3rd Q 2019 10-Q

So it appears that MCFO has a NCAV of $918,658 which offers some downside protection on the current market cap of  $1 Mil.

Adding in the  PPE brings book value up to $1,202,219.

When I was reading through the foot notes I noticed the following;

Picture
Source: MFCO 3rd Q 2019 10-Q

Why would  KeyBank extend credit of $500,000 secured against a property listed on the balance sheet as worth  $283,561 or less?

The latest quarterly doesn't break down the PPE so I went back to the last annual to see if I could find out anything more.  

Picture
Source: MFCO 2018 Annual Report

Looking at this the building only accounts for around 25% of PPE so it's depreciated value would be  $70K based on the 3rd Q PPE figure. There is no way MFCO's building is only worth $70K.

Here's a few pictures so you can take a look for yourself.

Picture
Source: MFCO website
Picture
Source: Google maps

The company website states the following;

"Microwave  filter Company    is located in the heart of Central New York State in what is known as “The Finger Lakes Region”. The company has occupied this modern 40,000 square foot facility since the early 1970’s. The facility has undergone many expansions and upgrades over the years. Our customers are always invited to visit when in our area. Please call for an appointment."
​

I'm no real estate expert but a 40,000 sqft commercial building  like that has got to be worth at least $1 Mil and probably more given that $500k in credit was extended against it.

Assuming it's worth $1 Mil then BV should be closer to $2.1 Mil or $0.82 per share.

​
Edit;

I decided to try and get a more accurate idea of the real estate value. 

According to the link below the average  P/SQFT for commercial real estate in New York State is around $100. 


https://www.reonomy.com/properties/commercial-real-estate/us/new-york/1

I couldn't find an average  P/SQFT for East Syracuse  but after looking through a bunch of other commercial properties in the area it seems they are priced at $80-100  per sqft with a lease price of $ 7-10 per sqft.

This would put a value of around $3.2-4 Mil for the building and a potential annual leasing revenue of $280-400k per annum.


A reader of my blog also  tracked down a tax appraisal for the building which  , as of 2015, put an appraised value of  $887k.

Picture
MFCO 2015 Tax appraisal on warehouse.

I also found out that Zeff Capital LP had made an offer to buy the company for $0.72 a share back in  early 2018. Given the apparent undervaluation of the real estate this figure seems reasonable.
​
​You can view the 8-K here

At that point Zeff owned around  220k shares but then cancelled the offer and more recently reduced their holdings to around 97k shares. See here

Another major shareholder, Gerst Capital, expressed  support for the buyout   offer and intimated that he would like to be appointed to the board if the deal fell through but  management have, thus far, not entertained that idea.

I've no idea what prompted Zeff to cancel the deal but since then MFCO has filed a form 15   which means it should be going dark.

The form 15 was filed in May but the firm is still listed as a current pink-sheet on the OTC markets so I'm not sure what is going on there.


Assuming  MFCO is going dark (they indicated that they would continue to provide financials on their site) then they should reduce their costs significantly bringing them back to profitability.

There are obviously some risks here,

MFCO is currently dependent  on a few clients for a large proportion of it's business.


"Net sales to two significant customers represented 54.0% of the Company’s total sales for the nine months ended June 30, 2019 and net sales to two significant customer represented 42.1% of the Company’s total sales for the nine months ended June 30, 2018. A loss of one of these customers or programs related to these customers could significantly impact the Company."

There's also no guarantee that going dark will  bring the firm back into the black though there is a good chance it will.

At present Zeff Capital still holds around 3.8% of the common and Gerst owns 11.5% via Gerst LLC and Gerst LP  according to this proxy management owns 6.9%


The firm has a backlog of around $700k, NOL carry forwards of around $700k  and enough cash to cover their debts.


$0.40 a share seems like a good deal to me  and I think fair value is closer to $0.80 a share. If the firm starts to turn a profit $1 might not be out of the question. Let's see what happens.


Thanks for reading,

David


Long MFCO
21 Comments
mike
8/24/2019 09:18:24 pm

In the last years this stock traded between about 40 cents and 1 usd. So a price of 80 cents is reasonable. Great find.

Reply
David
8/24/2019 11:13:52 pm

Hi Mike,

Thanks for the comment, it reminded me that I had forgotten to include the long-range chart in my post.

Initially when I found MFCO I didn't even realize the real estate was undervalued or that Zeff Capital had made the offer. I just saw a tiny illiquid company selling at a discount to book and struggling along. It would have been a buy just based on the chart and the P/B but the other stuff sealed the deal.

Reply
Dan Schum link
8/25/2019 08:05:31 pm

Love it! This stock has been on my list to buy for years and I've just never got around to doing it. I'll get there one of these days.

I don't follow too much. Saw they de-registered. Didn't realize Zeff was involved, always good to see.

Their massive stock spike 20 years ago is a thing of dreams. Maybe it'll happen again...

Reply
David
8/25/2019 09:09:51 pm

Hi Dan,

Given how much this one bounces around I'm sure there will be plenty of opportunities to take a position at a decent price. I've got more ideas than money at the moment, a good problem I guess.

If I scored a stock spike like that on a stock I'd die a happy man!

I noticed Zeff is also in on ELST, I need to get in on that one.

I'll be in touch soon, got some interesting stocks to share.

Regards,

David

Reply
Jan link
8/26/2019 12:37:18 pm

I really enjoy reading your analysis. Clear, straight to the point, showing the hard facts and little forecasting is needed. What I really like with these tiny stocks is that the present intrinsic value is easy to calculate (as long as you can dig for and find the information)

Reply
David
8/26/2019 07:02:14 pm

Hi Jan,

Thank you for your kind words. Credit goes to you on this one though since it was from studying your work that I realized the importance of checking to see if real estate is been undervalued on the balance sheet.

I agree, these small stocks where the business and the corporate structure is simple makes figuring out the value much easier. As you say, one just needs to put in a little time and effort to uncover the hidden value.

Regards,

David

Reply
David
8/26/2019 07:07:23 pm

Hi Jan,

Thank you for your kind words.

I agree, these small stocks where the business and the corporate structure is simple makes figuring out the value much easier. As you say, one just needs to put in a little time and effort to uncover the hidden value.

Regards,

David

Reply
Mike
8/26/2019 07:11:56 pm

Hmm, the stock price did go up by around 50% today. This stock is very illiquid of course. I am wondering if this blog is already so popular that it can impact the price.

I'm not so sure if the value of the building is so important. They need the building to operate the business. I like more that the PE or EV/EBIT is relativly low and that the stock is highly illiquid.

Reply
David
8/26/2019 07:43:29 pm

Hi Mike,

With these illiquid stocks the price can jump up and down on a single small trade though I sometimes like to imagine that it's because my blog is so popular, it's not by the way :)

Many of the stocks Dan Schum writes up do the same and then drift back down over the proceeding months once the small group of interested investors have taken a position.

I'm more of a balance sheet type of guy so I am drawn to tangible assets. You don't need the building if you just shut the business down and liquidate it. Maybe you sell it and lease it back, whatever.

It wouldn't surprise me if that's what Zeff had in mind, they certainly knew they was hidden value waiting to be unlocked.


Anyway, there's a lot of ways to skin a cat. I saw a cheap stock, I bought and now I wait.

Thanks again for taking an interest in my blog.

Regards,

David

Reply
Mike
8/27/2019 03:46:12 pm

BTW where do you invest? I understand in U.K and in U.S. or also in other countries? I think Japan (e.g. the stock 7462) would also be interesting, but because of the language barrier, you probably have to rely on the financials only.

Reply
David
8/27/2019 05:14:09 pm

Hi Mike,

I mainly invest in the OTC markets in the US and the AIM market in the UK but I have occasionally invested in Europe in the past. At some point I'd like to start investing in Asian securities but I just haven't got round to it yet.

I do have a copy of the Japan company handbook and this site is also useful for Japanese securities, it gives info in English including financials converted to USD;

https://www.kaijinet.com/jpExpress/Default.aspx


After taking a quick look at 7462, it appears to be trading at around 0.5x BV. There are way cheaper stocks than that on the Japanese markets, stuff selling below net cash etc.

You can find some good stuff by screening for negative enterprise stocks in Japan, just watch out for the financial firms.

Regards,

David

Reply
Mike
8/27/2019 06:58:33 pm

Yes, 7462 is not so low based on price to book. But it is low based on price to retained earnings. One study found that retained earnings are more relevant than net assets.
https://review.chicagobooth.edu/accounting/2017/article/why-value-investing-buy-signal-out-date

Reply
Mike
9/2/2019 09:02:26 pm

A cheap stock that I found is Imperial Ginseng, one of the world's largest growers of North American ginseng.
P/B is only 12%, it tades below net-current assets and P/S amounts to 0.5. MC is only 3 M but it is very illiquid.

Reply
David
9/2/2019 10:11:31 pm

Hi Mike, have you checked to make sure it's not a Chinese RTO?, why is it selling so cheap?

Could be interesting but I'd want to know why it's cheap and then start to value the assets on the balance sheet. I'd be wary of inventory in this case, I'd be focusing in on cash and real estate.

Reply
Mike
9/3/2019 09:10:20 pm

I found this company with a screener based on fundamentals only.
They grow the ginseng in Canada so their operations are not in China. A significant position are „biological assets” (Ginseng crops) in their balance sheet. They impaired a large amount of these assets and wrote down inventory by 250k in their last FS. So this resulted in a hugh loss as per March 31, 2019. Operating cash flow was positive.

The issue is that they sell their products to China and Ginseng prices declined significantly due to trade war and conflicts with China. So basically the company is in big problems. This explains the low price. I don't know if this is a buy. Probably it is not cheap enough.

Jason
11/11/2019 02:09:02 am

David,
I found the tax parcel info for the property

https://ocfintax.ongov.net/imate/report.aspx?file=&swiscode=312689&printkey=02400000060130090000&sitetype=com&siteNum=1

(if you ever need to look up a tax parcel/building for more information, google "parcel viewer <city name>")

I'm really happy you ended up on TIP. You have been bookmarked in my brower.
Cheers,
Jason

Reply
David
11/11/2019 10:41:12 pm

Hi Jason,

Great find with the tax parcel info, thanks for sharing!

Glad to hear you enjoyed the TIP podcast and my blog, more stuff coming down the pike soon.

Reply
David
11/12/2019 06:54:40 pm

Hi Jason,

Good work with the research and thanks for sharing. It further corroborates my assertion that the real estate is extremely undervalued on the balance sheet. One of these days that value will be unlocked.

Reply
Jim
11/12/2019 04:09:50 am

Thanks David, heard you speak on the last TIP... Loved the talk and enjoyed hearing your mindset. It was awesome. Thought I would comment here because I did go to school in the area and also have my doctorate in Microwave Engjneering. The inventory on their sheets could be greatly overstated because it could be for lower frequency equipment that is either not supported or used anymore. The Network Analyzers on the website looked so old that I don't think that there would be much salvage value in them either. On a different note, Syracuse does have a fair amount of RF companies so I would imagine that it could be ripe for purchasing. My last comment is that RF can sometimes be a "black art" so the company could pick up contracts here and there to remain solvent simply because they have a niche and are trusted by their customers. Thanks for the write up, really enjoyed it.

Reply
David
11/12/2019 07:00:38 pm

Hi Jim,

Thanks for getting in touch and for sharing your insights. I'm very interested to learn that Syracuse has some other RF firms based there, a buy-out would be good if the price was right. It will be interesting to see how this one plays out.

Reply
iota
8/7/2021 10:30:52 am

Hi David
Do we knw if MFCO will comply to the new SEC rule?
i have seen the owner bought stocks in July. not a lot ~5900 shares. but why would he throw money to the garbage? isnt it better for him to wait to september and by shares after the big dump?

Reply



Leave a Reply.

    David J. Flood

    UK based Investor. I focus
    ​on Net-nets, Pico/Nano caps, AIM/OTC/Dark stocks & Special Situations. Balance sheets & Long-range price charts are my guide. Looking for inflection points. Do not construe my blog as investment advice, always conduct your own due diligence.  Caveat Emptor!


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