Planetariums, hidden past earnings power, real estate, competitor bankruptcy, billionaire shareholders, stock buyback, and cheap. If that sounds interesting then read on…
Evans & Sutherland Computer Corp (ESCC) produces visual display systems and content used primarily in dome video projection applications for planetariums, schools, science centers, other educational institutions, and entertainment venues.
If you’ve ever been to a local museum with a planetarium there’s a good chance ESCC was behind it. They produce the software, hardware, dome, content, and support for the total experience. Their ability to handle the entire operation from installation to support is a key selling point that has allowed them to command a 50%+ market share. Their sales tend to have a high degree of variability in any given quarter or year, but that’s to be expected in a business that typically has a long planning cycle from the customer, as these are large projects that are mostly paid for with donor/fundraising dollars. Starting in 2018 the company adopted Topic 606, which has changed how they account for revenue from a project over time. The company says that this will actually help to smooth the recognition of revenues and the variability.
Hidden Earnings Power
Looking at the past earnings history you would see that prior to 2016 ESCC has not produced any meaningful earnings. This is because the company had large pension and corporate overhead expenses. In 2015 the company restructured its pension and reduced corporate expenses. In 2016 and 2017 the company was able to produce positive net income because of these changes, and will seemingly be able to continue generating cash flow for the foreseeable future. To see the true earnings power, we have to make adjustments to the historical financials with the reduced pension and corporate expenses reflected. From years of losses ESCC has large NOLs that will shield future earnings from taxes, so no need to worry about taxes for some time ($169M federal, $70M state).
Valuation
Shares have become much cheaper over the course of 2018 after hitting a high of $1.46 in 2017. Today, shares trade at $0.74 for a market cap of $8,957,135. On last years FCF the company is trading at ~16% FCF yield. Revenue has been trending higher in 2018 and during the first nine months the company has already done $28.6 million in revenue. Factoring this in ESCC is probably trading at greater than a 20% FCF yield!
ESCC has net debt of $2,224,000 as of September 28, 2018. This puts the enterprise value at $11,181,135. Valuing ESCC at a trailing EV/EBITDA multiple of 5.4X. Using the first nine months of 2018 numbers on a TTM EV/EBITDA is 2.6X. The company had a record breaking third quarter and has cautioned not to expect that going forward, but any way you look at it, ESCC is being valued at deeply undervalued prices.
Real Estate
The company owns a 47,000 square ft building on 15.2 acres in Chadds Ford, PA that sits off of a major highway. This property is used for office and manufacturing. The building is worth ~$4M. There is a bank note on the building with $1.363M remaining at an interest rate of 5.75%; the bulk of this is due to be repaid by 2024. This is added value, a margin of safety on the company’s debt and close to half of the current market cap, making ESCC look even cheaper.
Competitor Bankruptcy
Sky-Skan entered chapter 11 bankruptcy in 2017. The future of Sky-Skan is unknown, but a quick search on glassdoor reveals employees that paint a dire picture about management and the owners even if Sky-Skan is able to survive bankruptcy. This could lead to increased sales for ESCC over time.
Billionaire Shareholders
The largest shareholder of the company is successful billionaire investor Peter R. Kellogg, who owns about 37% of the company, and has recently been buying shares. A company of this size is a rounding error on his net worth, so I’m not sure what his end game or his reasons for owning the company might be.
The second largest shareholder is Stuart Sternberg, the principal owner of the Tampa Bay Rays, he owns close to 11%.
If not for nothing, it’s comforting to know the two largest shareholders are billionaires and have been long-term shareholders of the company.
Stock Buyback
The company has recently initiated a stock buyback of 1,600,000 shares, ~13% of the outstanding shares. As of February 22, 2018 there was 463,500 shares remaining available under the repurchase plans. The repurchase is a sign of their recent profitability and the realization of how cheap the company is being valued at.
Conclusion
Evans & Sutherland Computer Corp is a small off the beaten path company in a niche market that has been around for 50+ years. They are a dominate player in their industry being valued at a bargain price.
SRK Capital, LLC does not hold shares of Evans & Sutherland Computer Corp.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise may buy or sell these securities at any time.