Andri Capital releases a letter to the Board of Emerson Radio Corp. (MSN).
May 1, 2017
The Board of Directors
Emerson Radio Corp.
3 University Plaza, Suite 405
Hackensack, NJ 07601
Warren Buffett’s Annual Letter: Mistakes, Buybacks and Apple
Warren Buffett published his annual letter to shareholders over the weekend. The annual update, which has become one of the largest events in the calendar for value investors, provided Buffett's views on one of the most turbulent and extraordinary years for the financial markets in recent memory. Q4 2020 hedge fund letters, conferences and more Read More
To the Board of Directors of Emerson Radio Corp.:
As a minority shareholder in Emerson Radio Corp. (“Emerson Radio”, “MSN” or the “Company”) we are writing to you now to encourage you to take decisive and urgent action to enhance shareholder value.
Today the concerning situation is as follows:
Share price underperformance
We believe the shares of MSN to be significantly undervalued and trading well below liquidation (net cash) value. At the time of writing the shares trade at approximately $1.25/share whereas the Company’s book value is $2/share and net cash value (cash, cash equivalents and short term investments net of liabilities) roughly $1.85/share. Furthermore, the stock has on average stayed mostly flat ever since going public in 1994 as compared to an almost five-fold increase of the S&P500 for the same period.
Poor capital allocation
The company’s balance sheet consists primarily of cash and cash equivalents. On December 31, 2016 this amounted to approximately $51,8 million or 90% of book value. Given the current liabilities of $1,2 million and operating expenses (SG&A and other operating costs and expenses) of nearly $8 million the Company requires only $9.2 million to operate for a year (assuming no cash inflows). Rounding that to $10 million and allowing a “safety cushion” of equal amount leaves the Company sitting on roughly $30 million in idle cash. This amount earns next to no interest, results in return on equity that is significantly below its proper level and causes an overall decrease in efficiency.
The business of Emerson Radio is in a secular decline as is evident by the steady fall in revenues of more than 70% since 2012. Net income has also declined from a $10.6 million profit in 2012 to a loss of nearly $1 million in 2016. At the same time total operating expenditures have stayed mostly unchanged ($9 million in 2012 and $8 million in 2016). This raises some questions about the viability of the business going forward – for how long can it last without new revenue sources or cost cuts?
Based on the above, board and management must evaluate the prospects of Emerson Radio Corp. and take the appropriate action(s) in the best interest of shareholders. Unless the prospects are such that management deems liquidation to be the optimal course of action, in which case immediate steps should be taken to return capital to shareholders, we propose the following value-enhancing actions for the business as a going concern:
On December 19, 2016 the Board of Directors introduced a stock repurchase plan that approved the repurchase of up to $5 million of the Company’s stock. Since then the company has only purchased 18,600 shares at an average price of $1.00/share. This is less than 0.5% of what has been authorized. Given the currently low market price of the company’s shares (approx. $1.25/share) the right time to purchase shares is now. This will benefit shareholders, as long as stock is purchased at or below approximately $2/share. Furthermore, the board should reconsider the $5 million authorization and increase it to more appropriately align with the Company’s excess cash position ($30 million). We therefore strongly urge the board to take advantage of
the current market opportunity, increase authorized share repurchases and aggressively buy back shares.
One-time special (capital) dividend
The most beneficial cash-returning strategy for shareholders (in a going-concern) is a stock buyback plan. But if the market price rises beyond the approximate book value mark of $2/share the Company should return any remaining excess cash to shareholders by issuing a one-time cash dividend.
Strategic plan, sale or liquidation
We are well aware of the Company’s current business difficulties. In light of that, management might be inclined to view any capital returns as potentially harmful for the Company or diminishing for future opportunities (acquisitions, etc.). We don’t find such concerns to be credible since the Company has already held an excessive cash position for years. In fact, we believe that by returning cash to shareholders through share repurchases (and/or one-time dividend) the Company’s credibility will grow, its efficiency and return on equity will increase, and positive pressure will be put on management to come up with value-enhancing strategies (too much cash leads to slack and lackluster performance). Without a specific value-enhancing strategy to deploy the cash it should be returned to shareholders immediately. There is no need to hoard cash for some uncertain, potential future opportunity that might never happen (e.g. acquisition). If an opportunity later presents itself the company could always reissue the repurchased shares (at the now more proper price level) or tap into the debt markets (given how the company has no debt at all).
If, on the other hand, there exists a strategy to revive the business’ prospects the board should inform shareholders of the general contents of such a plan and accordingly justify the requirement of this large cash position for that plan. Otherwise, we urge the board to start exploring options for a potential sale or liquidation.
Given the continuous decline in revenues over the recent years and how it has now begun to negatively affect operating results we believe fiscal 2017 to be the deciding point for the firm’s future. Therefore, we strongly urge the board and management to take decisive action to ensure and maximize shareholder value. If implemented to the point, the suggestions outlined in this letter will unlock approximately $30 million in shareholder value (through aggressive share repurchases and/or one-time capital dividend), increase firm efficiency and credibility, and lower the cost of capital through a more proper share-price level of approximately $2/share (60% increase above current market levels of $1.25/share).
We hope you review our suggestions closely and start immediately to take decisive action in the best interest of Emerson Radio Corp.
We further welcome all discussions regarding the matter at any time.
Stefan A. Stefansson,
About Andri Capital
Andri Capital is a European-based private investment firm, est. 2017. The company invests in public equity and alternative asset markets around the world.