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Universal Security Instruments Inc. Message Board

  • patj30 patj30 Nov 29, 2007 9:57 PM Flag

    Things will get worse rather than better

    Alright, this may be hard to hear but I'll say it anyway. I was lucky enough to get out of this stock before the big downturn. The housing sector imploding was my clue to get out. If you listen to current market news most analyst don't expect a housing recovery for a minimum of 6 months out or could take as long as several years. Also, many believe we have not seen an end to the credit market woes which has a direct affect on housing. Now, if the dollar stays steady or even declines further then this is real bad news for UUU.

    This is what I think will happen.
    1. UUU will enjoy a bump up for a few weeks especially if there is another interest rate cut. This though may slide the US dollar further according to some analysts
    2. If the dollar remains low the Canadian operation can't turn around
    3. More bad news will come to the credit market...uuu will drop again
    4. Earning will come out...and they will be bad...real bad
    5. Stock will drop to around $5.00
    6. Stock will stay in trading range after this between $5-$6 for several quarters.
    7. Stock will begin climb in later 2008 as overall commercial and residential market recovers

    So, the good news you will have plenty of buying opportunity in the next year. Also UUU has the right distribution network to dramatically increase sales quickly as market recovers. I believe the stock will return to mid 20's and above in 2009. I'll wait to buy around 5 and make 5x profit or more.

    I don't hold any shares at this point nor am I short

    Thoughts anyone?

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    • I'm not convinced that UUU's trading is that highly correlated with the credit market concerns. Regardless though, you obviously made the right call to get out. I bought in a week before earnings and took a 15% loss, but it was a gift to be able to dump those shares around $15 after seeing the numbers. For the reasons you point out, even at $8, the risk/reward doesn't seem too compelling. With no catalyst on the horizon, there's no reason not to wait for a base to form. I can't imagine it going to the $5 you suggest, but it's a microcap with low earnings visibility and poor liquidity -- not exactly an efficiently traded stock that trades in-line with fundamentals. I wouldn't jump in here at any price without some signs of:

      - weakness in the Canadian dollar
      - improved sentiment in the credit and housing markets
      - insider buying
      - indications of an institutional buyer (perhaps the most factor at these levels)

    • You think this has further to go down when it is trading below book value? Why on earth should a company be trading for half of it's asset value - especially when half of it's asset value stems from a foreign company holding HK dollars and Chinese commercial real estate.

      Canada is trying to influence its currency down below parity once again as the manufacturing sector is dead. Dropping oil prices, and a potential start to new rate cuts in Canada might help expedite the process of the dollar rising against the loonie. If that scenario plays out, the upside from here is tremendous. The 480K loss will quickly turnabout into positive figures and a 320K quarter could move towards 1M - and that's even if the housing market continues to falter. And If that scenario doesn't play out -it's fair to assume we may get 1 or 2 quarters of breakeven net income, but we're still trading at below asset value. Plus, Any prudent investor should have a 10 year earnings horizon, not a 6 month earnings horizon.
      - Housing starts actually rose in October and the real pressure is being felt by homebuilders as profit margins evaporate on their remaining inventory. The number of units may decline further, but the bottom is very likely near. -

      Right now a share of UUU is 8.30. It seems that because it has dropped this low on relentless selling, you have psychologically accepted this to be its current fair value. It's just not. Liquidity problems and irrational fear seem to have caused certain US microcaps to go below tangible book value. Sure, the market can stay irrational for some time, but the market over the long term will find a more reasonable value.

      If you really think that reasonable value is 5$, which is over 50% lower than book value/share at ~10.60, re-read the definition of book value from Investing 101:

      "Book value is used in the financial ratio price/book. It is a valuation metric that sets the floor for stock prices under a worst-case scenario. When a business is liquidated, the book value is what may be left over for the owners after all the debts are paid. Paying only a price/book = 1 means the investor will get all his investment back."

      Any price below 10.60 (Book Value/Share) is buying below liquidation value. How many subsequent quarters of considerable losses are expected before book value hits the current PPS of 8.30? Well, let's consider UUU loses 400,000 dollar a quarter as it whittles down excess inventory. At that pace it would take 3 years of those losses to bring book value down to where we are trading now. One has to hypothesize there to be unrelenting bad news for over 3 years only to come to the eventual value of where we are trading today. And even in that hypothetical circumstance, it will assume 0$ dollars of future earnings potential.

      • 1 Reply to mmmparsley
      • In a bull market - or if UUU can spread out into more countries - Universal can pump out 36 million smoke alarms from the HKJV. Beyond that, potential sales from Canada after a potential US dollar recovery is around 40-50 million$ in revenue a year.

        At 8$ per smoke/CO2 alarm - am I wrong in assuming that the HKJV has the potential to bring in 280 million in revenues from smoke alarms/CO2 alarms alone - if that is the case - all they need to do is get licenses in new markets to fully leverage the HKJV operation - and that's what they are working on doing right now.

        IN addition to this revenue potential, UUU is introducing a whole new product line in just 2 months.

        There is potential growth coming from all different directions here, and currently every market UUU is in right now is bearish. As long as one of them turns around, earnings will accrue nicely over the coming years.

        The best possible scenario in a few years could play out like this....

        1. The HKJV earns 250 million at 12% margins...
        =25 million earnings - 12.5 million of which is Universal's share - or 3.1 M per quarter bringing after US tax income to 2.3 million.

        2. The company sells 6 million a quarter to Home Depot at 5% marings adding 300,000$ quarterly.

        3. The USD rises against the CAD and UUU is able to triple capacity selling 14 million$ of conduit a year at 8% profit margins adding 1.0 million to the bottom line.

        4. Housing picks up and UUU is able to sell 10 million dollars in alarms to US customers at 10% margins, adding 1M to the bottom line.

        5. Carbon Monoxide Alarm legislation is adopted by various states driving demand for CO2 alarms.


        In this scenario it shows UUU has the potential of bringing in 4.5-5 milllion a quarter and 18-20 million per annum, considering everything goes their way. Given a 12x PE at those figures, is it not impossible to assume UUU may hit a market cap of 210-240 million dollars or around 85$ per share within 3-4 years?

        Although that scenario is unlikely to play out perfectly, one has to figure that possibility into the equation.

        My conclusion is that a worst possible scenario brings UUU down to 6$-7$ for a few years. The best scenario would merit UUU to be as much as 100$ per share in a few years.

        SO what is fair value? My guess - 20$.


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