Brooks Automation (BRKS) Keeps Getting Cheaper: In Net/Net Territory

At this year’s New York Value Investing Congress, David Nierenberg of D3 Family Funds made a compelling case for Brooks Automation (BRKS), primarily known for its tool automation business. Surviving after dozens of acquisitions, an option backdating scandal, and overall poor management, Nierenberg suggested that brighter days are ahead, and that shares are undervalued.

Just two months later, after navigating perhaps the most volatile period in market history, Brooks has been nearly halved and can currently be had for around $5 a share. What’s more, Brooks has been teetering in and out of net/net land (trading below net/net current asset value), a fact which really grabbed my attention.

Net/nets have been more prevalent the past few months than I’ve seen in many years. It’s no surprise given the brutal markets, which have punished smaller companies that typically fall into this unique category of deep value investing.

With a current market cap of $320 million, Brooks’ net current asset value (current assets minus total liabilities, and minority interest in Brooks’ case) as of September 30^th was $217 million, putting it not all that far out of net/net territory, a place it’s saw recently before running up the past few weeks. Furthermore, the company currently carries $143 million in cash and short term marketable securities, so the quality of current assets is quite good. When judging a net/net the quality of current assets is very important, and cash is preferable, all else being equal, to inventories, accounts receivable, or other components of current assets.

Brooks also lists $34 million in long-term marketable securities on the books, primarily treasuries. By design, the net/net calculation ignores non-current assets, giving them an “icing on the cake” quality, if there indeed is any value there. In Brooks’ case, total non-current assets are $325 million, $178 million of which is goodwill and intangibles. Property plant and equipment, listed at $81.6 million, and the $34 million in long-term marketable securities are the icing on the cake.

Theoretically, buying Brooks at its current price is like buying $2.25 in cash, $1.17 in other current assets (net of all liabilities), and getting an additional $5.11 in long-term assets, $1.82 of which are PP&E and LT marketable securities. Brooks currently trades at just .58 times book value, and .88 times tangible book value, and the company has no debt. Sweetening the deal is $114 million in net operating loss carry forwards, which should offset income for several years.

Of course, such deep valuations are not uncommon in the current market environment, and Brooks’ future success is predicated on improving operating performance. Indeed, they do appear to have adequate liquidity to weather the storm

Jonathan Heller, CFA