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;
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;
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;
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.
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.
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.
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.
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.
I'd like to know the acreage of the plot too.
The booked cost price is listed as $143k and equates to around 2% of PPE, thus it's depreciated value is around $5.2k
After a quick check I found out that 1 acre is equal to 43,560 sqft, looking at the picture I'm guessing the plot of land is around 4-5 acres.
So we've got a rough cost price per acre of around $28-35k and a depreciated value per acre of $1-1.3k.
I can't find a good figure for current average P/acre in New York state or East Syracuse but it's definitely not $1-1.3k.
I now think the true BV for MFCO is probably closer to $4.3-5.1 Mil or $1.66-$1.97 BVPS
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 recently reduced their holdings to around 97k shares. See here
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 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.
Edit: I now think fair value is probably closer to $1.6-2 per share after a back of the envelope calculation on the current likely sale value of the real estate.
Thanks for reading,
David J. Flood
UK based Value Investor.
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