vii company logoWhopper is a deep value investor. He blogs at http://www.whopperinvestments.com

Vicon Industries (VII) is an interesting stock that fits in pretty well with my new focus on profitable stocks trading well below book value. It’s already been well written up over at Frankly Speaking, but I thought it was interesting enough that I’d give it a write up here.

Vicon designs and manufactures security systems, mainly focusing on video systems. That’s not really what’s interesting about them. As a matter of fact, that’s the least interesting part of them. The business is actually pretty crummy. Historically, it’s been a money losing operation. They had a brief profitability spike from 2007-2009, but even during the spike return on equity averaged out to the low double digits over those three years. Aside from that spike, the business has consistently lost money over the past ten years. Let me make a distinction though: most net nets are burning through money. They’re not losing money hand over fist, and they’ve been mostly cash flow positive. They’ve just been generating modest losses.

However, just because a business is losing money doesn’t mean it’s a terrible investment. Vicon has two interesting things going for it.

First, it’s dirt cheap at today’s prices. Currently trading for a shade under $4.00 a share, Vicon has net current assets of $5.54 per share and tangible book value of over $7.25 per share.

Second, there are several catalysts to unlock the value discrepancy between the share price and their asset value. The company has been buying back shares. Again, not massive, but they managed to buy back about 3% of their shares outstanding last year and a tiny bit more this year. There are also several activists pushing the firm to unlock shareholder value, including one who just had a director elected to the board. The company has tons of excess liquidity on their balance sheet and could pay a dividend of at least half of their current share price without affecting their day to day operations at all, and that seems to be the direction the activists are taking.

So there is a lot to like here. I think shares are pretty undervalued at these prices……. but I’m sitting on the sidelines right now. I like the catalysts, but ultimately I’m still worried that this business just can’t earn a profit. While I could see myself eventually going long the name, I’d rather be invested in a stock like LAKE. It doesn’t trade for as large a discount to net current assets, but it trades for a huge discount to book and has a long history of profitability.

Disclosure: Long LAKE

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