Cheap and unexciting places to put cash by Chris Scott
In this environment, I’m looking for cheap and unexciting places to put cash until I come across a high-quality company selling at a cheap price. At recent prices, Peerless Systems (PRLS) might be such a cheap and unexciting place.
Peerless is trading at a significant discount to net cash. Despite $48 MM in cash and $9 MM in total stated liabilities, Peerless is only trading at $28 MM. The company has recently undergone a significant change in its board of directors. During the later part of 2008, Peerless’ CEO resigned as CEO and Director and left the board with Timothy Borg, Steven Bathgate, and Steven Pully. These directors are an experienced group and their bios can be seen on the company website: http://www.peerless.com/.
What makes PRLS different from any other cheap microcap lying around these days? It’s looking like shareholders may soon realize underlying value as the company recently announced a material corporate event that highlights the potential for a definitive realization. On February 3, 2009, Peerless announced the termination of two leases, both effective January 30, 2009, at a cost of $2.7 MM—leaving the net cash balance at $8 MM. One of these leases pertained to Peerless’ headquarters in El Segundo, and the company announced that it had “not yet determined the address of its principal executive offices following February 28, 2009 [the termination date of the lease].” With February 28, 2009 quickly approaching and no determination on the location of Peerless’ headquarters, potential outcomes involving a special dividend greater than the current share price or an orderly liquidation may appear more probable.
In an 8-K filed July 7, 2008, the board announced their desire to acquire or merge with what amounts to a high-quality, mid-market company. The major risk in Peerless is a the pursuit of a value-dilutive acquisition. There hasn’t been any news regarding Peerless’ acquisition hunt since last July, and it doesn’t appear that the current directors are perversely incented to pursue a value-dilutive acquisition.
As February 28, 2009 approaches—and passes—shareholders can reasonably expect clarity on which the direction the board has chosen: the definitive realization of underlying value or a continued pursuit of announced acquisition strategy.
I’m a shareholder and I have a high opinion of Tim Brog and Peerless stock, but this is really some pathetic “analysis”. Why don’t you pick up the phone and call the company and ask about those leases. This speculation that February 28th is some magic date for shareholders is completely idiotic.
Regarding the acquisition — the company has stated that it is pursuing an acquisition. You can “reasonably expect clarity” on that subject by doing some real research rather than making wild and insane speculations about their lease terminations. Yeesh.
Comment by jeff — February 23, 2009 @ 11:51 am
I have only used publicly-available information in composing my post. I had not spoken to the company prior to my post and relied on the Termination of Lease Agreement and Lease Termination Agreement filed by Peerless on February 3rd. It is my understanding that since I am a person covered under section 243.100(b)(1) of Regulation FD, if there is material information not contained in those agreements or the accompanying 8-K, then a call to the company would not help uncover such material information without potentially creating an issue under Regulation FD. I believe this issue regarding calling the company about the leases is just a difference in personal comfort with speaking to the company.
While I pointed to February 28th as the date Peerless must no longer occupy its headquarters, I only used it as another milestone in resolving the eventual outcome for Peerless: whether the company pursues, and successfully closes, an acquisition or doesn’t. Without a principal office, it seems reasonable that the likelihood of scenarios involving dissolution have increased, especially if Peerless’ acquisition hunt doesn’t prove successful.
In my post, I specifically referenced the 8-K filed by Peerless in which the company explicitly states its acquisition criteria. While the company has stated that acquisition candidates are being “evaluated,” I suppose it’s a matter of interpretation in determining the difference in value between “seeking acquisition candidates” and ‘evaluating a number of acquisition candidates.’
Regardless of any difference in whether Peerless is seeking or evaluating an acquisition, there are a number of “potential risks involved in such transactions [an acquisition], including, but not limited to, lack of necessary capital, the inability to satisfy closing conditions, failure to identify suitable business entities for acquisition, the inability to successfully integrate such businesses into our operations, and the inability to make acquisitions on terms that we consider economically acceptable.”
Nothing I’ve read (and I may be mistaken) seems to indicate these risks no longer exist. While I believe I did not imply that February 28th is “some magic date” or a date certain, it does not seem unreasonable that, at some point after February 28th, the company will provide clarity to shareholders on the address of its principal executive offices following February 28, 2009 and the status of its evaluation of acquisition candidates.
Peerless offers a compelling margin of safety at current values, even if nothing happens. On top of this margin of safety is the potential that the company closes a great acquisition. Current prices offer a discount to any such acquisition. The closing of an acquisition may prove to be the catalyst that highlights Peerless’ asset value.
Comment by admin — February 24, 2009 @ 12:22 pm
Look, I like Peerless stock too and I am on your side in this trade. I just get annoyed at investment writeups that wrongly promote the idea that an event is imminent. Such reasoning is seductive to people who read your work and I think it does them a disservice. You wrote:
1) “What makes PRLS different from any other cheap microcap lying around these days? It’s looking like shareholders may soon realize underlying value as the company recently announced a material corporate event that highlights the potential for a definitive realization.”
2) “With February 28, 2009 quickly approaching and no determination on the location of Peerless’ headquarters, potential outcomes involving a special dividend greater than the current share price or an orderly liquidation may appear more probable.”
3) “As February 28, 2009 approaches—and passes—shareholders can reasonably expect clarity on which the direction the board has chosen: the definitive realization of underlying value or a continued pursuit of announced acquisition strategy.”
None of these statements is specifically false (though they are misleading), but you are fostering the idea that February 28th (5 days after you posted the write up, not a lot of time to do your own work), could mark a catalyst. I think that is a lame way to write up a stock.
The facts in this matter are:
1) The company has been trying to get out of those leases a long time, so while it is nice they managed to do so, this is not a major crossroads in the Peerless story.
2) The company does seem hellbent on doing a deal. Obviously, I think the best thing for shareholders like me is to take a sure thing (the money!), but the board and management do not seem to be going that route.
3) You point out that the board of directors is populated by “an experienced group” but you do not mention that they own a teeny number of shares. . .if they had sizeable stakes in the company, they might be a little less keen on doing a deal.
All in all, I think you could have framed the story in a fairer way to your readers.
Comment by jeff — February 25, 2009 @ 10:55 am