A New Position: FORD

Forward Industries Inc (NASDAQ:FORD) is a new position for me. It's trading at a discount to net cash and liquidation value, but there’s no obvious catalyst in the stock at this stage. Management appears to be considering a “strategic transaction” of some kind, although this might include an “acquisition or some other combination.” At its recent $1.60 or so, FORD has a market capitalization of about $12 million. I estimate the liquidation value to be around 60% higher at $19M, or $2.60 per share. Trinad Management did have an activist position in the stock, but has been selling recently and only one stockholder owns more than 5% of the stock. I'm attracted to it because it looks cheap, and I think the elements are in place for a catalyst to emerge, so I bought some.

About FORD

FORD designs, markets, and distributes “custom-designed, soft-sided carrying cases and other carry solutions products made from leather, nylon, vinyl, and other synthetic fabrics.” The cases and other products protect “portable electronic devices such as medical devices and cellular phones.” It sells directly to original-equipment-manufacturers in Europe, the “APAC Region,” and the Americas and to retailers and distributors in the United States, Canada, and Europe. It has been in operation since 1961.

The value proposition

FORD has been confronted with blustery headwinds over the last four years. FORD management write in the most recent 10Q (for the year ended March 31, 2009) that “deteriorating economic conditions, rising unemployment, tight credit markets, and heightened uncertainty in financial markets” has “adversely impacted discretionary consumer spending, including spending on the types of electronic devices that are accessorized by [FORD's] products. [FORD's management] expect this challenging business environment to continue in the foreseeable future.” Revenues are down from $50M+ in 2005 to less than $20M this year. The drop in net income has been even more precipitous, from a profit of $12M in 2005 to a loss of $1.1M in the most recent quarter, bringing the loss for the last 12 months to around $1.9M. Despite this, FORD still had around $19M of cash and equivalents at the end of March (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

FORD balance sheet adjustments

I’ve made the following adjustments to the balance sheet estimates:

* Cash burn: I’ve got no real idea about FORD’s prospects. Its cash burn over the last 6 months has been around $0.8M. That was made up of a net loss of $1.3M, reduced by $0.6M for non-cash items, and changes in working capital items of $0.1M. Accounts payable decreased $0.6M, which had the effect of contributing to the net cash used by operating activities. If I assume, as management has, that the company will face a similarly tough operating environment over the next 12 months, I estimate cash burn of around $2M.
* Off-balance sheet arrangements: According to FORD’s most recent 10Q, it has no off-balance sheet arrangements.
* Contractual obligations: FORD’s contractual obligations are minimal, totalling $0.6M.

After making the adjustments above, I estimate FORD’s liquidation value at around $19M or $2.60 per share.

Possible catalysts

FORD’s President and Acting Chairman, Mr. Doug Sabra, said in the letter to FORD shareholders accompanying the notice of annual shareholders’ meeting, that in 2008 “management began to implement operational and strategic initiatives in order to put [FORD]’s business on a stronger, more sustainable footing. … This past August we retained an outside consultant to assist us in vetting possible partners for a strategic transaction.” It seems that the “strategic transaction” might include a “possible acquisition or other combination that makes sense in the context of [FORD's] existing business, without jeopardizing the strong financial position that we have worked so hard to build.” FORD’s focus on a “strategic transaction” is a positive, in our view, although our vast preference is for a sale of the company, buyback, special dividend or return of capital over an acquisition.

Any transaction will require the consent of FORD’s board. While it has a free float of around 92%, the company’s so-called “Anti-takeover Provisions” authorize the board to issue up to 4M shares of “blank check” preferred stock. From the 10Q:

The Board of Directors has the authority and discretion, without shareholder approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the relative rights and preferences thereof including their redemption, dividend and conversion rights.

Conclusion

At its recent $1.60 or so, FORD is trading at a huge discount to its $2.60 per share liquidation value and $2.16 per share net cash value. While there’s no obvious catalyst in the stock at this stage, management’s consideration of a “strategic transaction” is a positive. The risk to this position is management spending the cash on an acquisition. I think a far better use of the company’s cash is a buyback, special dividend or return of capital. Another concern is Trinad Management exiting its activist position in the stock. Those concerns aside, I'm attracted to FORD because it looks cheap at such a discount to net cash.

long FORD