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Universal Security Instruments Inc. Message Board

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  • mmmparsley mmmparsley Nov 30, 2007 12:12 AM Flag

    Things will get worse rather than better

    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.
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    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.
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    - 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. -
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    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.

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    • 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.

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      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$.

      Dave

 
UUU
3.22+0.14(+4.55%)Jul 22 4:00 PMEDT