Portfolio Company $NEI Acquired at 85.8% Premium to Last Close

by on June 19, 2012

in Sales, Small Cap Value Stocks

The saga of Network Engines (NEI) comes to an end with the agreement today with Unicom Systems to acquire the company for $63.2 m in an all cash deal and take it private. The price offered at $1.45/share is 85.8% above the closing price of NEI yesterday at $0.78/share.

I recommended and purchased Network Engines stock in January this year as it represented a great value at that time. Subsequently, the company lost about 30% of its revenues as EMC pulled away some business from NEI. The stock, responded with large declines over the last few months, so much so that at one point the stock could be purchased at about 50% discount to its Net Current Asset Value.

A classic Benjamin Graham net-net play, I recommended and added to my initial position on its way down. Typically, when a stock becomes so severely undervalued, with respect to its tangible and liquid assets, something good eventually happens. Acquisition is often the most likely result.

A profitable company with no debt, significant cash holdings and the inventory itself worth more than the market valuation. Add to this the fact that the company plays in the security and storage sector, with applications to the cloud computing, and it is no surprise that a suitor will step forward. And so it did.

The buyer got themselves a sweet deal as well, buying up the company for $1.45/share, given that the book value of the company today is around $2.23/share.

My average cost for the stock worked out at around $1.24/share and when my sell order executes, I will likely end up with about 15% gain. For a holding of 5 months, this gain is not too shabby. This will also bring Value Stock Guide’s portfolio return YTD in the high teens, comfortably outpacing S&P500.

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Investaup June 19, 2012 at 4:13 pm

@arohan Buying cash rich companies gives you two options. Growth or buy out. Hats off to you sir.

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arohan June 19, 2012 at 4:35 pm

@Investaup Thanks Pete! It worked out well

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Value Stock Guide June 19, 2012 at 4:40 pm

Thanks Michael. If I recall correctly you bought some at my recommendation at a much better price then I did :-)

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pbanik June 20, 2012 at 6:21 pm

Outstanding pick @arohan …it’s rare to find a company with a P/E ratio under 2, and a P/BV ratio under 1, but you have managed to do so. I used Morningstar to check the valuation.  
http://financials.morningstar.com/valuation/price-ratio.html?t=NEI&region=USA&culture=en-US
 
However, there is something I ran across that might be of concern if you wish to initiate a position in this stock:
Law Firm Brower Piven Announces Investigation in Connection With the Acquisition of Network Engines, Inc. by UNICOM Systems, Inc.
http://finance.yahoo.com/news/law-firm-brower-piven-announces-194100346.html

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ShaileshKumar June 28, 2012 at 1:27 pm

 @pbanik  @arohan Thanks Paul! This worked out really well. The law suits are common when an acquisition like this is announced.

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pbanik June 29, 2012 at 9:15 am

 @ShaileshKumar  Well, I think another  stock you might want to look at is PBI.  That stock looks like it is possibly undervalued, and the dividend is fairly healthy. The one thing I don’t understand is why the price/book ratio is so high compared to the industry average and the S&P500.
 
http://quote.morningstar.com/stock/s.aspx?t=PBI
http://financials.morningstar.com/valuation/price-ratio.html?t=PBI&region=USA&culture=en-US
http://investing.money.msn.com/investments/stock-price?Symbol=PBI&ocid=qbes
http://investing.money.msn.com/investments/stock-ratings/?symbol=PBI
http://www.stoxline.com/quote.php?symbol=PBI

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ShaileshKumar June 29, 2012 at 12:45 pm

 @pbanik Probably not so cheap. Their trailing EPS is padded with one off gains. High debt and significant goodwill on the book as well.
 
Might make sense as a possible turnaround play. Will take a look

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