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ELXS - ELXSI Corp.


KJP
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ELXSI Corp. (ELXS) is a $55 million market cap, OTC-traded company that operates two distinct businesses:  (i) the Cues division, which manufactures and services robotic video inspection equipment for sewer and drainage systems; and (ii) six  restaurants in New England.  The restaurants represent a legacy business that has shrunk to irrelevance.  The investment thesis rests on the Cues.

 

Here are the company’s operating figures for the last four years:

2011 2012 2013 2014

Total Revenue $60.3 million $63.9 million $64.4 million $76.4 million

Cues Revenue $51.9 million $56 million $57.2 million $68.7 million

Operating Income $4.4 million $4.9 million $5 million $7.9 million

Free Cash Flow

(OCF – Inv CF) $1.6 million $6.2 million (400,000) $5.8 million

 

The Company has used its free cash flow to eliminate its debt, build cash and buy back shares:

As of 12/31 2010 2011 2012 2013 2014

Cash $514,000 $543,000 $4.4 million $2.7 million $7 million

Line of Credit $3.2 million $1.8 million $0 $0 $0

Shares Outstanding 4 million 4 million 3.95 million 3.5 million* 3.375 million

Amount spent on repurchase $0 $0 $360,000 $1.2 million $1.1 million

 

*The bulk of the share count reduction in 2013 was caused by the Company’s receipt of shares in exchange for a related-party note receivable.  This transaction is discussed below.

 

I have no particular insight into Cues’ business, but it appears to be in an industry with good tailwinds.  As Dave Waters from Alluvial Capital explained in a blog post:

 

“The outlook for Cues’ products is bright. American water and sewer infrastructure has suffered under-investment for generations and is approaching a critical state. Water mains one hundred years or older are still in use in many areas, and some cities still rely on pipes made of obsolete materials, even wood . (In all fairness, it seems that wooden pipes actually have quite a long useful life, though they require quite a lot of expertise to repair.) In my view, products that enable inspectors, engineers and others to evaluate existing infrastructure will be more necessary than ever in coming decades. Of all the various types of infrastructure, water delivery and treatment systems are among the most critical and most need of investment, and Cues will benefit from that trend.”  (http://otcadventures.com/?p=1283)

 

ELXSI has $34 million in NOLs that don’t begin to expire for several years.  Based on its recent history, the company should be able to use all of them.  Discounting for time value, I’ll ballpark the present value of the NOLs at $8 million.  I also assume that the company needs cash equal to 3% of annual sales to run the business, leaving excess cash of $4.7 million.  Finally, the company has a legacy liability that shows up on the balance sheet as “Phantom Stock Option Plan.”  The legal status of this liability is not entirely clear (it is discussed on page 20 of the 2014 annual report), but the company has been paying interest on it, apparently since 2003.  So I will include it as a debt.  After accounting for all of these items, I estimate the company is trading for about 5.5 times EBIT.

 

Shares Outstanding 3,375,129

Current Share Price $15.80

Market Cap $53.3 million

Excess Cash ($4.7 million)

NOL ($8 million)

Phantom Plan $2.8 million

EV $43.4 million

2014 EBIT $7.9 million

EV/EBIT 5.5

 

If that was all there was to the story, I think the company would be quite cheap.  But unfortunately, there’s a history of dubious transactions between the company and its Chairman/CEO.  The grisly details of the most recent transaction are explained in the Dave Waters’ post linked to above and are described in the footnotes to the 2013 and 2014 annual reports.

 

As a result of the 2013 transactions, the Chairman/CEO will almost certainly receive 400,000 shares over the next five years.  As far as I can tell, none of those shares is reflected in the current 3.375 million share count, though the company did expense $1.6 million towards this compensation in 2014.  So, operating income numbers already reflect this expense, but potential investors should look carefully at the likely dilution from this deal and, more generally, whether they want to partner with the Chairman/CEO.  I think the potential of the Cues division makes the risk worth it, but others may not. 

 

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I've been watching ELXS since the 90's.

 

A family member owns some shares and has done quite well with them.  I owned some shares at one point and made a small profit.

 

HOWEVER, the amount of insider transactions simply boggles the mind.  There was all sorts of stuff going on with the restaurants.  Leases with family members if I remember correctly.

 

The CEO is an alumni of Harvard.

 

The CEO has a proclivity for treating shareholders VERY poorly.  Does anybody think that is going to change?  I wouldn't bet against it.  I sold my shares and won't be buying any in the future...

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I've been watching ELXS since the 90's.

 

A family member owns some shares and has done quite well with them.  I owned some shares at one point and made a small profit.

 

HOWEVER, the amount of insider transactions simply boggles the mind.  There was all sorts of stuff going on with the restaurants.  Leases with family members if I remember correctly.

 

The CEO is an alumni of Harvard.

 

The CEO has a proclivity for treating shareholders VERY poorly.  Does anybody think that is going to change?  I wouldn't bet against it.  I sold my shares and won't be buying any in the future...

 

Yes, there were additional related party transactions several years ago related to sale-leasebacks of the restaurants.  To say the least, management does not get a A for its treatment of shareholders. 

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  • 1 month later...
  • 2 months later...

For those interested in ELXS, it just reported another great quarter, with net sales up 13% and operating profit up 60% year-over-year.  The company attributed the jump in operating margin to "higher margin sales and higher production volume absorbing a larger share of the indirect factory overhead expense."

 

The company generated about $3.2 million in FCF during the first six months of the year and continues to buy back shares.

 

The share price is volatile due to very low volume.  At the last trade price of $19.75, the market cap is up to around $70 million, though with the increase in operating profit I still put it on an EV/EBIT multiple of about 5.5, pretty much the same as it was several months ago when the share price was around $15.75.

 

Quarterly report:  http://www.otcmarkets.com/financialReportViewer?symbol=ELXS&id=143037

 

Press release:  http://www.otcmarkets.com/financialReportViewer?symbol=ELXS&id=143041

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ELXSI is up about 70% since the first post, but continues to be cheap in light of its profitable growth.  Q1 2016 sales for the Cues division were up 25% year-over-year, and quarterly EBIT was $3.1 million.  In addition, the company now has $20 million in cash.  Quick valuation below:

 

Market Cap:  $90 million (3.7 million shares x $24.50) [includes dilution from incentive shares already earned but not yet issued]

Cash:  ($20 million)

NOL: ($10 million)

Phantom Plan $3 million

EV: $63 million

EBIT: $12 million

EV/EBIT:  5.25

 

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Recent writeup from another source on this company, which continues to perform quite well:  https://www.valueinvestorsclub.com/idea/ELXSI_CORP/140400

 

I agree with the author's take on the quality of the business, but I think s/he sugarcoats management's past actions and what they could do in the future to transfer value from minority shareholders to themselves.

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Agreed.  I come across this company often when I am running some of my screens.  Its gotten so bad that I have a sticky note to ignore them until management is gone and I assume they will be sold at that point and there is no profit.  There is no point at any level of cheapness if the management is horrible.

 

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Deal closed, shares are delisted and the deadline to waive appraisal rights (for a faster payout) is Friday. I managed to snag a few shares after the deal was announced a few weeks ago at $49.25 and expect to get paid next week. Not bad. I did some work on this last year and it looked interesting but I never bought because of the insider mess.

 

Another great KJP pick.

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