Micro cap special situations investor John Leonard, CFA has an interesting take on Natural Alternatives International, Inc. (NASDAQ:NAII), #5 in the Small and Micro Cap Screener. It closed at $5.65 today, but it’s worth $10+.
- Financial strength ($17 million in cash or ~ 56% of market cap and no debt)
- Low valuation (P/TBV of 0.81x, EV $13.4 million, EV/EBITDA of 2.09x)
- High cash flow (EBITDA of $6.4 million, FCF yield of 22%) expected to increase due to lower capex spending on manufacturing equipment ($2.3 million FY12 and $1.7 million FY11) and lower patent litigation expense (~$1.8 million in FY12 vs ~ $1 – $1.5 million in FY13)
- Undervalued assets (owns corporate headquarters in San Marcos, CA valued at depreciated cost on balance sheet)
- Shareholder friendly management completed more than 75% of $2 million buyback plan from 2011
- Strong history of margin improvement (gross margin 21.22% in FY12 vs. 12.72% in FY09, operating margin 8.51% in FY12 vs. 0.54% in FY09, EBIT 6.2% in FY12 vs. 0.96% in FY09)
The sale of the company via MBO, LBO or to a strategic buyer is the best way to maximize shareholder value due to the premium received, significantly higher IRR compared to alternative shareholder friendly measures (e.g. starting a dividend, increasing buyback or leveraged recap) and elimination of high and increasing compliance and regulatory costs (mentioned below). The sale should ideally take place after the sale of the branded products and patent estate.
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