Frank Voisin is a value investor and independent analyst whose site, Frankly Speaking, contains Frank’s investment theses as well as educational material to help investors avoid value traps. Subscribe to Frank’s feed here.

Peerless Systems Corp. (NASDAQ:PRLS) licenses imaging and networking technologies for use in printers and multifunctions. In 2008, it sold substantially all of its operating assets to Kyocera-Mita Corp., but retained the intellectual property which it now licenses. The company is trading at a slight (5%) discount to its NCAV, but the interesting story of PRLS relates to its EPV.

Several months ago, the company offered to repurchase up to $45 million in common stock at $3.25 per share. (It appears this transaction may have been at the behest of an investment firm that, subsequent to the completion of the tender, had its representatives resign from the board and tendered its own shares). The tender was undersubscribed by approximately 5% and the company repurchased 13,214,401 shares, leaving just 3,357,519 outstanding as of November 10, 2010. The company financed this ~$43m repurchase with cash on hand, leaving the company with $12m cash remaining. Using TTM earnings of $7.639m and the new shares outstanding, this translates to EPS of $2.28. But the company is trading at just $3.20, representing a P/E of 1.4x. What gives?

One possible explanation (as always) is that the future is not expected to be the same as the past. In PRLS’ case, that would seem to be a possibility, as the company notes (emphasis added)

The technology we license has addressed the worldwide market for monochrome printers (21-69 pages per minute) and multifunction printers (“MFP”) (21-110 pages per minute). This market has been consolidating, and the demand for the technology offered by us has continued to decline since fiscal year 2008. The document imaging industry has changed. Lower cost of development and production overseas as well as increasing complexity of imaging requirements makes us unable to effectively compete in this environment. … We are currently pursuing other potential investment opportunities. The strategy calls for aligning our cost structure with our current and projected revenue streams, maximizing the value of our licensed back technologies and expanding our business through investment opportunities.

From this, we may conclude that, without extensive R&D to remain competitive, the company should be treated as if it were in secular decline, with future revenues substantially lower than past revenues. Furthermore, the company has extremely concentrated revenues, with greater than 70% of revenues coming from less than three customers in any given quarter. Thus, the loss of just one or two customers could prove catastrophic. The decline is likely to come quickly, rather than a slow petering out. It could be that the market is discounting this information and that is why the price has not climbed subsequent to the repurchase. What do you think?

Talk to Frank about Peerless Systems.

Author Disclosure: No position.