More Net-Nets

A couple of months ago I posted regarding the value investing concept of a net-net (http://2outof4.blogspot.com/2009/03/net-nets-and-more.html). The Company that I highlighted in the post turned out to have been an interesting candidate for further work. So I wanted to throw out a couple of more this afternoon.


By definition these investments are very speculative and I would not put them on the Interest List per se, but that does not mean they should not be on your personal interest list.


The first one comes from a future Hedge Fund manager based in the Pacific Northwest. It is a leveraged play on the price of gas. TravelCenters of America LLC (ticker: TA) operates travel centers primarily along America's highways.

Not only are TA's current assets less total liabilities plus 35% of Plant, Property, and Equipment (PPE) equal to 59% more than TA's current market value, but its net cash (Cash less Total Debt) is almost doubt the current market value. What does that all mean? - either inventory is overpriced or the value of TA's property is overstated on the balance sheet. However, the Company only keeps three days worth of fuel product on balance sheet and its hard to believe the real estate has no value.

There may be some legacy issues with corporate structure as well. However, as my friend in the Northwest posits, if TA experiences a tick up in its fuel margins and can earn even half a percent of net income margin, this stock is significantly undervalued. At half a percent on last year's sales total, the Company would be trading at 1x earnings!

Does anyone out there have any insight as to why TA has traded so low and looks like such a potential bargain?

Imation Corporation (ticker: IMN) is a little easier to understand why it is priced for bankruptcy. Its main businesses are involved in deadly price competition in dying markets. However, there may still be value in IMN with current assets less total liabilities amounting to $395 million compared to market value of $293 million or 35% more.

If one ignores IMN's Flash business and Electronic Products business, and just focus on the magnetic tape business and CD business, one calculates a normalized PE ([Enterprise Value divided by sales]divided by a net income margin of 2%) of 5.7x. Yes, these businesses are declining but still necessary and IMN has effectively consolidated the category into leading global market shares. The Flash business is priced as competitively as DRAM and therefore I attribute no value to it. So, if IMN can turnaround Electronic Products and generate a profit there, that business is all upside.

At its current valuation, the market is predicting bankruptcy and I'm not convinced that is a given!

-2outof4