Pretty interesting
You are probably tired of me coming in with the same idea. I know it’s tiring but somehow I keep finding these ideas. Props to Twitter. Twitter is actually amazing for finding new investment ideas, but there are also dumb ideas which I’m not going to mention. For example, Tesla. But I’m not going to rant about how overvalued these folks are. Today I bring to you Insignia Systems. Again, deep value + special situation. This is similar to GigaMedia (GIGM) and Allied Esports (AESE). Though, it’s a bit different. The difference is that Insignia has activist investors involved to unlock shareholder value.
Let me give you an intro into what Insignia Systems is. Insignia Systems is an in-store advertising service company that offers advertising services to multiple brands, either big or small to showcase their products at retail locations. Nothing special, just boring. The case is, their main revenue source was the Point of Purchase Services or POPS, which was essentially a big display with signs that were shown before you entered the aisle where the product is in order for you, the consumer, to keep the product in mind when you go through the aisle and essentially make you impulse buy. So they have been discontinuing this segment and focusing more on non-POPS services which are essentially On-Brand services and Merchandising services. Non-POPS revenue has been growing significantly the past year and now into 2022. Last FY if i’m not wrong it grew about 61% vs 2020 and 1Q 2022 it grew 48%. Offsetting this, the POPS segment has been declining significantly and now only contributes to 4% of revenue when it used to contribute 44% of revenue in 2020.
So that was a small summary of the business. Now into steps taken by management in order to better run operations. Management ran a cost cutting program that reduced their staff by 19%, they moved operations and headquarters into smaller, more efficient buildings saving a lot on lease expenses that essentially dropped to the bottom line. These cost reduction initiatives are expected to bring about $500,000 annually in cost savings which should dramatically improve the company’s overall profitability. In response, the company posted its first profitable quarter after losing millions in operating income every quarter. It seems that the cost reduction program is working and now positively impacting the bottom line.
From a first glance, if you read the company’s balance sheet you won’t find any value. They don’t have enough cash to be a deep value play. That’s when Twitter comes into play, to feed me ideas that a screener does not see. This company just got into a settlement and is being awarded $20m. Keep in mind this company sells for $15m. So you already have more cash than the whole value of the business which is a step in the right direction. In a balance sheet you also won’t find the amount of Net Operating Loss carry forwards (NOLs) they own. The company owns $9.7/share in NOLs or $17.5m. NOLs are a great way to value creation as once the entity becomes profitable, you can reduce substantially the amount of tax you have to pay. This amount of NOL’s make this company a perfect candidate for an acquisition or merger. That is why reading the 10-k is so essential and necessary in order to make sound investment decisions. The company currently has a $4m book value, but when that cash comes in, it will be $24m in book value or Net Current Asset Value (NCAV).
The company recently announced that they will seek strategic alternatives in order to maximize shareholder value and appointed an investment banking firm to assist them in the process. This is a huge catalyst for the business and shareholders as this is a great way to maximize the value for shareholders.
Another positive is the appointment of an activist investor into the board of directors and now serving as chairman of the board. Nick Swen, CEO of Air T and several investment funds own approximately 50% of the shares outstanding of Insignia Systems. That’s a big amount of control in a company. He knows shareholder value can be unlocked and he is here to do it. The company also announced another activist investor, David E. Lazar announced a 5.1% position in the company. These two people, I believe, will help the company choose the best option possible to maximize shareholder value as they have their own money in it and they depend on the success of the company in order for them to make money for them and their partners.
If a strategic alternative is not found, then a special dividend is likely to be announced as they stated in their 10-K “We may consider special dividends in the future depending on outcomes of actions such as legal proceedings.”
In any case, your downside is limited by the amount of cash the company is holding. I always try to focus more on the downside than on the upside, as a company can have a lot of upside, but also a lot of downside. But a company with no downside can only go up or sideways which avoids permanent loss of capital, and that is what we try to avoid in order to get the best returns possible.
