We believe that TMPL is now a very compelling long investment idea due to an imminent catalyst. TMPL is a grossly undervalued orphan company with an imminent catalyst to unlock its tremendous value. Due to its size, float is limited and this idea has been particularly targeted. However, due to its audited financials, large insider ownership, a late stage stage fundraising process and the recent spin off of an equity stake, it is one of the few small caps trading on a public exchange.
TMPL owns a 5% stake in the publicly traded but privately owned MemoryWorks Holdings (MYWK), a makers of MemoryWorks products (e.g. PCs, servers, notebooks...). MYWK was spun off from Intel on September 22, 2002 in conjunction with the acquisition of Amkor, a Brazilian IT Services company acquired by Intel in 2005 (see prior write-up for more detail on the acquisition). Since that time, shareholders have been good and the stock has been a good performer. Management has split one third of their ownership to shareholders and I expect that the remaining holdings will eventually be put to the side to focus management on creating shareholder value.
I believe the stock's valuation gap is temporarily driven by a strengthening dollar, a temporary delay in putting the remaining holdings to the side and only a temporary weakening of the USD. I believe all these factors will be corrected over the near to medium term. Here is a snapshot of the company's financial performance and characteristics:
The business is currently going through a cyclical downturn in its third quarter, so despite its market leading position and strong cash flow, the current valuation reflects the trough of the cycle. It is an easy to pick at just about any investment cycle and any macroeconomic theme as the weaker dollar will hurt any foreign investor who does business in the US. To explain the relative cheapness of the stock, I will use a number of case studies below. In the first example, I will use the previous writeup with much more detail so please feel free to check that prior in case the below descriptions are not sufficient.
In 2003, the company acquired a European company (Promethean) which became the second major customer for TMPL's Thermal Monitors. Promethean's customer base, the medical monitoring industry, was growing rapidly at the time so the company believed that a strong European economy would be a big driver of growth. As you can imagine, the economy fell off considerably after the 9/11 terrorist attacks and after the War in Iraq. The company's Gross Profit from this division fell from 70 million to 28 million.
The second example is the recently-mentioned spinoff of MemoryWorks. Based on recent transactions, this is also trading at about a 3 times sales. I expect that both of these examples will eventually work out because the company already has the manufacturing capacity in place for what it believes to be the only remaining part of its MediaMonitors series of passive x-ray fluorsometers. In fact, the company originally believed that it would be several years before it would be fully production for customers but late last year, with the additional capacity, the company increased its guidance. So what do we have? We have 40 million in excess capacity and an existing business with the capacity to produce 20 million of free exposure per year with a steady flow of new business wins. The market cap is $36 million. The business trades at about 58 times this next year's earnings and over 3 times its FFO. I see two immediate ways to look at this which may not seem immediately obvious.
The first way is that cash flow is the metric by which the future actually reflects the value of the current company. In this case the company is sitting on genuine hidden gem of a cash flow stream which I believe has real promise. If I believe the same management team is going to harness its hidden overhead at a 15% operating margin going forward, I think it's easy to overlook how the present value of that cash stream and future prospects can be earned.
The second way is that TMPL sits on a business that could easily hold its own in a more demanding and competitive environment. With more than 70% of sales through a distributor, the company sits in an enviable position as the low cost producer in a highly competitive industry. At just 10% of 2007 sales and roughly break-even today, I think there is real margin of safety here. One need not be a belief in peak oil or in the Hunger Games to realize this. One thing to keep in mind is that if management's goals are met, this is still a very modestly profitable business and the balance sheet is actually strengthened from a standalone basis. As I stated before, I am by no means counting on any of Mr. Market's precious metals sense to keep a six dollar book from becoming a six dollar debt overnight.