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Trade Alert: Added EXX.A sold NEN   10/5/2004

Today I sold all (100 shares) NEN at $80 and purchased 5000 shares of EXX.A at $1.65 for the model portfolio.   EXX.A ( or EXXA EXXa EXX/A in different brokers)  or EXX.B (EXXB EXX/B)  is rated as "very favorable" in Hot list for risk/reward ratio.  EXX.B(class B shares)  is similar to EXX.A(class A shares). The difference is that Class B has more voting power (2/3 of board of directors) so that B shares are worth more than A shares. However, majority of EXX. Inc shares is A shares so that A shares have more liquidity.  This stock has small float, do not use market order to buy or sell it.

Rational for EXX.A or EXX.B investment

History - new EXX = old EXX + Newcor

EXX, Inc company really have 2 parts: before Jan 2003, EXX.A was toy company producing toy parts, toy engines, kite, etc.  In Jan 2003  EXX.A purchased Newcor with 6 million dollar cash and took Newcor out of bankruptcy.  Newcor was auto parts and machine tool equipment company that filed bankruptcy in 2001.  Currently Newcor division revenue is 80% of EXX.A total revenue. Therefore EXX.A is mainly an auto parts company.

EXX.A is unfavored due to big contract loss

EXX.A current PE is 4.5.

The reason that EXX.A price crashed recently from $6 to $1 and the price is so cheap is because one big customer will discontinue business after Summer of 2005. The contract loss will shrink EXX.A revenue by 20% after later half of 2005.  In my opinion the market over-react to the contract loss and the EXX.A is good turnaround story for the long run. By my estimate, EXX.A will still be able to make 2 million pretax profit to pay the interest after 2005. Of course there will be one time charge for layoff and shutting down facilities. But the net effect is that EXX.A will likely to continue to be profitable after 2005.

How much is EXX.A worth?

Highlighted bbelow from 1991 - 2003 is its earning and book history.  David Segal has been CEO during all those years. Mr. Segal business track record has been pretty good.


EXX.A & EXX.B
 2003
 2002
 2001
 2000
 1999
 1998
 1997
 1996
 1995
 1994
 1993
 1992
 1991
EPS
 0.51
 0.07
 0.01
 0.08
 0.18
 0.06
 (0.02)
 (0.12)
 0.17
 0.20
 0.05
 0.04
 0.03
Book per share
 1.61
 1.06
 0.97
 0.93
 0.90
 0.72
 0.66
 0.68
 0.80
 0.63
 0.43
 0.38
 0.34

From 1991 to 2002 EXX.A has  average Earning per share  = $0.06. Before Newcor acquisition, EXX.A had $1 book value and roughly $0.8 per share   NCAV (Net Current Asset Value). As we know in Benjamin Graham books, NCAV value  is considered liquidation value of a company.  After Jan 2003 to July 2004, EXX.A made 8 million dollar of earning or $0.66 per share earning.   Therefore, the valuation of EXX.A is at least 0.8 + 0.66 = $1.46. EXX.A is worth $1.46 to $1.66 per share, which is roughly current book value.  Further more, between now to July 2005 before the contract loss, EXX.A will likely to make 0.3 earning per share. Therefore, the EXX.A book value is likely to go up to $2 per share next year.


Below is Newcor hypothetical pro forma earning adjusting for impairment, goodwill amortization, etc. The earning per share is calculated as if Newcor was acquired by EXX.A since 1993. Note the up or down of the operating margin during past business cycle.

Newcor
2002
 2001
 2000
 1999
 1998
 1997
 1996
 1995
 1994
 1993
Pro Forma Operating profit before interest, tax (millions)
 12.9
 (4)
 11.5
 14.7
 12.7
 8.3
 6.8
 2.9
 (3.4)
 7.7
Pro Forma Operating margin
 7.5%
 (2.3%)
 4.8%
 5.7%
 6.2%
 6.3%
 6.1%
 2.4%
 (3%)
 6.7%
Hypothetical Pro Forma EPS  after interest,  tax
 0.63
 (0.33)
 0.51
 0.69
 0.58
 0.34
 0.26
 0.05
 (0.29)
 0.31

The average earning per share from 1993 - 2002 is about $0.28.  2003 earning of Newcor is already included in EXX.A earning table. 

EXX.A already made more earning in 1.5 years than the price EXX.A paid for Newcor.  Because David Segal was already insider of Newcor (Co Chairman of Newcor since 2001) in the acquisition and because the acquisition was approved by creditors in bankruptcy court, $6 million price tag for Newcor or $0.50 per share was at least fair price if not a bargain then.  In my opinion Newcor division is worth much more than $6 million or $0.50 per share. My estimate of Newcor division valuation is closer to PE 8 X 0.28 = $2.24 a share.

By combining Newcor and Exx.A historical earning, we can obtain 0.06 + 0.28 =  $0.34  earning per share. By applying PE = 8, EXX.A is worth $2.72 per share.  The extra value mainly comes from Newcor division. Current price of $1.65 does not reflect the extra Newcor value after the acquisition.

EXX.A customers are not very concentrated

Currently EXX.A  only have 2 big customers that have 10% -  20% revenue, one of them will discontinue contract after later half of 2005.  The rest of customers (more than 100) has less than 10% revenue each.  The risk of big contract loss is not very big from now on.

EXX.A can pay debt for next 5 years without problem

EXX.A is leveraged, by examining the annual report, I do not see problem for EXX.A to pay debt interest and principle on schedule with its large cash position and future earning.

Insider Buying at $1.30

David Segal purchased lots of shares at $1.30. This price can be used as guideline of valuation of EXX.A.  Insiders typically only buy their own shares at very cheap price.

Huge Insider holding

Davide Segal and 2 ladies  (rumored to be David's daughter, but I do not have proof for that) hold over 60% of shares EXX.A + EXX.B. They have incentive to turn the EXX.A price higher and turnaround the company.

Minor negative issue on management

There are some concerns with this company. One concern I have is the relative high salary of CEO David Segal. However, due to past great EXX.A track record and large insider holding, I will not consider this as big issue.  Further more, large portion of his compensation is performance based,  or 5% of company pretax earning, which make sense  in my opinion.  The more profit company makes, the more salary CEO can get, and the more profit we as investors will get in the long run.  Part of Newcor compensation also is limited by Newcor Creditor. According to bankruptcy agreement the Newcor bonus (about 400k) can not be paid to CEO until the debt is paid down.


Recent strike news is positive news

The recent negotiation of salary cut etc. are also a good sign that management is taking action to cut cost.  To turnaround the company, the key is to cut cost and maintain liquidity of company and wait for better economics.

Conclusion

Invest in EXX.A for the long run. Target $2 a share in 1-2 years and $3 or more in 2-3 years time frame.   I would buy it at big crash at low price, the lower the better. I would not buy it when it flies high. Because EXX.A risk reward is not best among all my holding, I rate this only as "very favorable" risk reward in hot list.


Blast Investor Model Portfolio Update


Blast Model Portfolio - Performance (as of 10/05/2004) :


Portfolio inception date
 12/31/2003
Portfolio inception value
 $89,000
2004 YTD Performance
 28.25%
S&P500 Index 2004 YTD Performance
 1.94%


Blast Model Portfolio - Open Positions (as of 10/05/2004) :
Symbol Last Shrs Value Paid Gain
ADGO.OB 1.10 9,000 $9,900.00 0.78 $2,870.00 +40.83%
CHK 16.85 1,100 $18,535.00 13.90 $3,235.00 +21.14%
EXXa 1.69 5,000 $8,450.00 1.65 $190.00 +2.30%
HRB 49.02 350 $17,157.00 54.00 -$1,753.00 -9.27%
LIBHA.PK 4.50 1,200 $5,400.00 5.10 -$730.00 -11.91%
NRG 27.49 670 $18,418.30 23.05 $2,964.80 +19.19%
NTES 39.20 250 $9,800.00 36.60 $640.00 +6.99%
SOHU 18.22 700 $12,754.00 24.882857 -$4,684.00 -26.86%
USG 19.49 950 $18,515.50 18.425789 $991.00 +5.65%
WLL 32.83 600 $19,698.00 22.683333 $6,068.00 +44.52%
$$CASH -24,486.5 -$24,486.50 - - -
11 symbols Total(USD):
$114,141.30




Model Portfolio Transactions
Date  Type Symbol Shares Price Comm Amount Notes
Oct 6, 2004 Buy EXXa 5,000 1.65 10.00 8,260.00
-
Oct 6, 2004 Sell NEN 100 80.00 10.00 7,990.00 + 48.15%
Oct 5, 2004 Buy USG 250 18.75 10.00 4,697.50
-
Oct 5, 2004 Sell NTES 100 39.12 10.00 3,902.00 + 6.9%
Sep 30, 2004 Buy USG 700 18.31 10.00 12,827.00
-
Sep 29, 2004 Sell NEN 100 79.65 10.00 7,955.00 + 47.5%
Aug 5, 2004 Buy WLL 250 23.50 10.00 5,885.00
-
Aug 2, 2004 Sell NEN 100 69.95 10.00 6,985.00 + 29.5%
Jun 17, 2004 Sell HCA 250 40.30 10.00 10,065.00 - 4%
Jun 17, 2004 Buy NRG 670 23.05 10.00 15,453.50
-
May 24, 2004 Sell ADGO.OB 13,000 1.55 10.00 20,140.00 + 98.7%
May 10, 2004 Sell HCA 250 39.97 10.00 9,982.50 - 4.8%
May 10, 2004 Buy SOHU 200 15.59 10.00 3,128.00
-
Mar 5, 2004 Buy WLL 350 22.10 10.00 7,745.00
-
Jan 26, 2004 Sell WRP 700 17.40 10.00 12,170.00 - 5%
Dec 31, 2003 Buy CHK 1,100 13.90 10.00 15,300.00
-
Dec 31, 2003 Buy NEN 300 54.00 10.00 16,210.00
-
Dec 31, 2003 Buy HRB 350 54.00 10.00 18,910.00
-
Dec 31, 2003 Buy NTES 350 36.60 10.00 12,820.00
-
Dec 31, 2003 Buy SOHU 500 28.60 10.00 14,310.00
-