Taitron: Promised Cash

Taitron Components (TAIT) has been discussed on this site as a potential value investment. The company has a bloated inventory position; inventory sits above $12 million, while annual sales are barely over $7 million. This is where the value opportunity comes from, however, as the company trades for significantly less than its inventory position.

Management recognizes that inventories are too high, as per the following statement in Taitron's most recent quarterly report:

"[W]e are focused on lowering our inventory balances and increasing our cash holdings."

But even as inventory has been slowly decreasing, the company's cash balance has not been rising. A major reason for this is that the company has been funneling money into joint ventures. Most recently, Taitron agreed to invest almost 10% of its market cap in cash for a minority stake in a Chinese company.

Only some of this money has already been invested, however. The bulk of it is committed (as per the notes to the financial statements) but remains listed under "cash" on the balance sheet. Investors should adjust their cash expectations for this company accordingly, as some of it has been promised away to other entities with rather uncertain returns.

For many companies, investments to expand the product/service portfolio should be encouraged. But when a company has a poor track record of allocating capital (Taitron has lost money in 8 of the last 10 years), shareholders should beware.

Consider the company's next largest commitment, a $150,000 investment (or 4% of the company's market cap) in a joint venture which "is not operational and as such, there has been no activity in this joint venture during 2010." In fact, that money has been tied up for years, as there was no activity in either 2009 or 2008. To the company's credit, management did respond to a call seeking comment, and asserted that they are pursuing a change in strategy and should get most of that money back (from the joint venture with no operations).

The good news for shareholders is that management owns a significant stake in this business. The bad news is that they don't appear obsessed with shareholder returns, to put it mildly. Based on the discount at which this company trades to its assets, each value investor must decide for himself whether the risks are worth the potential returns.

Disclosure: Author has a long position in shares of TAIT

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to the feed.