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Universal Security Instruments Inc. Message Board

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  • mmmparsley mmmparsley Aug 28, 2007 8:26 PM Flag

    Does UUU deserve the low valuation?

    I completely disagree. After years of torrid growth, UUU saw that they were overly reliant on the housing market and decided to diversify their product line and decrease a long-term earnings shortfall risk.

    Remember - what did UUU pay for the conduit company? Wasn't it like 2.5 million (that's off the top of my head). It was somewhere in that range. All we have to do is wait 3 quarters for that investment to pay off big time. UUU is losing money because they have to invest in the conduit company in order to increase production and sales to the point where they can turn the company into a profitable one.

    If all we have to do is wait a year before making the full investment of 2.5M back in what I estimate to be the next 1 1/2 years, we should be thrilled at the buyout. The Icon/Intube deal should bring about 10% to the bottom line. As production triples, it appears that it will increase net profits about 1.8 million. I also believe that CCC will be creating tax-free profits for a while to make up for past losses. Was paying 2.5 million for a company that will start out producing profits at 1.8 million per annum and most likely grow from there foolish? I think they took advantage of a golden market opportunity where a buyer has the funds to make it profitable and the seller simply doesn't.

    The HKJV is going to be highly volatile. If earnings reached 1.1 million per quarter only 2 quarters ago, there is no reason to believe it can't get back to those levels in the near future. Production has increased tremendously, and UUU should be increasing their orders from the HKJV in order to fill their Home Depot retail space.

    Also encouraging is that management is holding tight to their shares. Option exercises have been held tight and the CFO thought it prudent to buy shares on the open market at price well higher than we are trading now.

    This company is too cheap. It will be 30 by the end of the year if investors realize more about this company and its prospects.

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    • >>>"Remember - what did UUU pay for the conduit company? Wasn't it like 2.5 million (that's off the top of my head). It was somewhere in that range. All we have to do is wait 3 quarters for that investment to pay off big time. UUU is losing money because they have to invest in the conduit company in order to increase production and sales to the point where they can turn the company into a profitable one. "

      The price for the conduit business has been far greater than 2.5M. 2 quarters of loses from that business totaling another 2M-2.5M, and a loss of confidence. Clearly they got caught by surprise with the loses because if they had been expecting them, they would have included this expectation in previous 10Ks. Their prior statements, while not painting a high profit picture for the division, did not give any indication they were expecting loses. Your statement about losing money due to the investment in the business does not hold water. Capital investments in plant and equipment do not appear on the P&L, they appear as assets on the Balance Sheet.

      The real cost of the Conduit business is currently running at about $5M (in purchase price and subsequent loses) plus a hit of between $10M & $20M in market cap.

      I do agree that Management was trying to diversify, as they should have. I also believe that in the long run, assuming they learn how to manage foreign companies, UUU will be far better having made the investment. Furthermore, I am thrilled with their HD retail channel agreement.

      Regarding HKJV, I think it is a mistake to look at one great quarter and extend that out to future earnings. As you state, the earnings are likely to be highly volatile. When valuing a company using PE (which was the primary concern addressed in your first posting), I am willing to pay a higher PE for predictable, consistent earnings growth. With extremely volatile earnings, and indeterminable future earnings, a lower PE is more appropriate.

      I am not saying they won't come back, in fact, I suspect they will (which is why I am holding on to my significant position in UUU). I am only stating that I think a PE of 10 is probably a fair valuation right now given the surprise drop in earnings and uncertainty about future earnings growth.

      • 2 Replies to valuemakesmerich
      • The purchase of Icon has actually given me more faith in the management, not less. They knew that it was losing money and that they would take an earnings hit while they brought it to profitability, but they did it anyway because it's the right move for the long term growth of the company. Too many companies these days are focused on beating earnings every quarter and hitting estimates that they wont make any big investments for long term growth.

        As someone who is looking to hold my shares for 10+ years, I am very happy with this investment. If a year or two go by and the conduit business is still not profitable, then I will start questioning the management.

        - Matt

      • I don't think it is fair to take the recent loss of valuation and call that a cost that should be tagged on to the buyout price of the Icon/Intube deal. It is certainly fair to assume that the recent losses are added cost, but remember, the buyout price was around 2.5 million. What kind of company would sell-out for 1/3 of annual sales if it was profitable? Of course losses were to be expected in the near term.

        UUU stated many times that the strategy was go triple the production capacity at ICON/INTUBE so that the company could turn around and be profitable. Hence, it was an unprofitable company with recurring losses before the buyout. UUU never stated it would create profitability out of the situation in less than a quarter - or even a year. I think it's naive to assume UUU management can't understand how to read an income statement, and that they are surprised at the losses that the conduit company has cost them over the last 2 quarters.

        Housing will turn around. You hinted that commercial/industrial real estate has also been lagging. Is that the case? I believe the commercial market has surged around 15% this year. I don't think a lagging commecial real estate decreasing potential demand is a factor. I think quite the opposite is true.


    • I agree entirely with you.

    • Excellent post. I would only add that the comparisons look bad in part because of the higher tax rate in '07. Also while Home Depot is a huge positive, at the moment anything connected with HD is not looked at kindly. People need to focus more on the non-U.S. revenue and the J.V's value and the advantages it provides.

      The conduit business is being given far too much attention. You're right on the small investment. Once it has a positive quarter, the apparent fear of a permanent drag on earnings will go away. That should occur soon as they reaffirmed again that it would be profitable in calendar H2. This is a great time to buy the stock IMHO. Once it turns, it can move quickly with little volume.

      • 1 Reply to hotpanera2
      • I agree on the positive outlook, but I think you need to be a bit more careful in discussing the conduit business. Just because UUU completes the expansion of the plant and steps up production, it does not mean that this can be done PROFITABLY. That depends on the construction market in Canada and the US. At the moment, that market does not look nearly as good as it did at the time of the acquisition. Remember, the conduit produced by UUU is strictly a commodity. It sells on three factors only: price, price and price. Any further rise in the Canadian dollar will further squeeze margins in the US where most of the expansion is slated to take place. If metal prices do not decline a bit, we will continue to see margins squeezed here as well.

        I have no doubt that in the long run, the conduit market will come back in a big way. That is when UUU will profit significantly from the acquisition. In the interim, however, it is my opinion that it is foolhardy to just assume that there will be profits (or even an end to the losses) from the conduit business.

        One last note, I assume that the big expansion will enable UUU to produce with greater efficiency (and concommitant lower cost per unit). That will let UUU outlast some of the competition in the conduit market -- if the currency cooperates. If my assumption is not correct, then there will be hard days ahead for this segment of the company.

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