Mead Instruments Corp.

We believe that the value investing style is frequently overlooked by Green, Clean and Socially Responsible Investors.   Meade Instruments Corp. the manufacturer of telescopes and telescopic products could be classified as a Clean Investment with negligible environmental impact.

Meade Instruments Corp (symbol: MEAD) is a classic Benjamin Graham Net Net stock which we are long in equity portfolios.   Meade is a manufacturer of telescopes and telescopic instruments, with hardly a taint of excitement or sex appeal.  Meade is your typical boring, mundane, blase…well you get the picture, its a boring company in a boring industry.

Unless you’re a financial geek in search of Margin of Safety stocks where looking at the company’s balance sheet Net Current Asset Value (NCAV) is larger than the valuation of Meade’s market value by a sizable amount.

As of 9/2/2010 Meade shares are trading at $3.24 a share.   They have 1.17 million shares outstanding and the total market cap is a nano-sized $3.79 million dollars.

Cash on hand amounts to $3.33 a share, which is a drop of $1.2 million from last year due to losses in the company’s operations.

Inventory amounts to $6.72 a share

Book Value $10.18 a share

Current Assets $12.27 minus Current Liabilities $3.42 = $8.85 a share

At present Meade is losing money and the cash drain might tap out current cash levels in one to two years, assuming no reduction to inventory levels which could be converted to cash.  The company is faced with increasing foreign competition resulting in lower sales, reduced distribution outlets and the reality of being the manufacturer of a discretionary item in a weak domestic economy.   Higher end and more profitable telescopes are less favored by consumers nowadays than lower end, lower margin scopes.

To compensate Meade is cutting costs on many levels ranging from administration and employment costs, reduction to R&D and reducing manufacturing costs.  In addition, Meade has sold three divisions: Simmons, Weaver and Redfield for gross proceeds for approximately $15 million.

It would be hard to make a valid rationale for the purchase of shares from a growth perspective since there is no growth, quite the opposite in fact.   Meade is facing the reality that the manufacture of telescopes with competition from lower cost manufacturers in China is likely going to be a losing proposition.

The investment appeal:  Management has a great deal of incentive to at least preserve the value of the company and its shares.   Management owns approximately 36% of the shares.  Based on the latest SEC filings Hummingbird Capital (a private small stock value oriented hedge fund) Paul Sorkin owns at least another 10% of MEAD shares.  There are a few other value managers who might take an activist role who’ve purchased shares.

My belief is the company is preparing itself for the potential of being sold.  The disparity between the share price and current cash + inventory of $10 a share is much too great a gap.    The majority of shareholders have a great incentive to close the gap, preserve the Meade brand name and allow it to operate as a division of a larger company.

Estimates to the potential sale price might largely depend on the value given to their sizable inventory of $6.72 a share.   If we were to reduce the value of inventory to half or $3.35 a share then add back the current cash of $3.33 we arrive at $6.68 which could be a conservative estimate.   The aggressive estimate would likely be closer to the current book value of $10.18.

This is a risky stock and shares are thinly traded.   The company may choose to nothing which would drain their cash reserves and further reduce book value.   The company could sell off its entire operations and convert to an all cash company and reinvent itself.  Time will tell but I do feel the rewards could be in the range of 100% to 200%.

Be careful out there



Solar stocks bounce……for now at least.

Over the past few months we’ve spent a fair amount of time determining what value this blog could add to its readers.  We’ve essentially boiled down our conclusions to the point where we could identify with many outstanding financial blogs that espoused old school investing in regards to value, balance sheets and growth, we could not find any that merged with the ideals of socially responsible or green investing.  That is when the light bulb turned on as this is the type of analysis performed daily.

Being an investment adviser in the Boulder Colorado area would seem ideal since the area is chock full of alternative energy companies but with 20 years in the industry we also are very aware that the vast majority of these firms will not exist in their current form in just 3 or 5 years from now.   As a rule of thumb the strength of their balance sheet in light of sales or a weak economy (and weak fossil fuel prices) will determine their inevitable success or failure, not sales, hype or even great technology.

Case in point regarding solar stocks:  Reuters is reporting that a parliamentary mediation solution in Germany may reduce the amount of subsidy cuts in solar.  Solar has been weak across the board with the expected cuts coming from Europe due to their financial crisis.  Hence, why we’ve been avoiding the sector for over a year with the understanding that if a company cannot generate its own revenues without subsidies despite the lofty projections for worldwide revenue estimates, then the investment will likely be a loser.

In the interim we’re assembling a list of solar stocks and searching for those falling to extreme values (Price to Net current asset value) where risk should be minimal.

Ultimately, we think that the European mess will get worse and the domino effect of proposed subsidy cuts are inevitable hence solar stocks with significant European exposure are trades not investments at this juncture.

Markets are quite overbought in the short term and we don’t believe now is a good time to be adding new money to equities as the window of opportunity appears closed for the near term.   The ideal time would have been a couple of weeks ago when fear approached extreme levels not seen since last March.

On the bright side, the weak Philly Fed data would have poleaxed the markets had it been released 2-3 weeks ago, whereas today it only creates mild selling.  This leads me to suggest that a slowing economy is now baked in the cake.