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Tecumseh Is Unfathomably Cheap

Tim Melvin

Before I move on to another of my little cheap stocks I want to share with you some of the anecdotal economic observations in which I occasionally indulge. The wife and I have spent a part of this week at the beach in Ocean City, Md. I like coming down here off-season and just sitting on the balcony and working to the sound of the waves.

The town is pretty empty, even for off-season. Even this early in April there is usually more activity in the resort town, especially around a major holiday. Although there have been signs of some improvement in the economy, it looks to me like the high gas prices are keeping some folks at home.

We have also noted an extraordinary numbers of properties -- especially small hotels -- for sale along the oceanfront. The real estate agencies are advertising lists of foreclosed properties on their signs and billboards, so I suspect prices still have a way to fall for what was once the strongest resort market in the mid-Atlantic. Things may be slowly getter a little better, but judging by Ocean City this past week it is still a long way from good.

I suspect the management of my next micro-cap stock pick would agree. Tecumseh Products TECUA has struggled the past several years; it hasn't been profitable in the past five years and had another large loss in the final quarter of 2011. The company makes compressors that are used in things like air conditioners and refrigerators, and there simply is not much demand for its products in a weak economy. In 2011, sales fell by a little over 10% (unadjusted for currency fluctuations). In the final quarter of the year sales fell a whopping 22% year over year. The forecast for this year is for a slight increase in sales of 2% or 3%. It is likely the company will be unprofitable for the full year once again in 2012.

As a result of the very difficult operating environment and ongoing losses, the stock is very cheap right now. Tecumseh shares trade at just 30% of tangible book value and less than 2x net current asserts. If you value the long-term assets such as machinery, equipment, lands and buildings at $0.20 on the dollar, the company is at less than half the realizable liquidation value. True, the business outlook remains poor, but the stock is cheap enough to start buying.

The bright spots for this company are going to come from emerging markets and a stronger global recovery. The expansion into countries like Brazil and India has shown very positive results for Tecumseh. The company has been restructuring and cutting costs, and this push should help margins. When we see a stronger economy, this company should see explosive profit growth for several years as pent-up demand emerges for refrigeration and air-conditioning products.

There is no need for a mad rush to buy shares of Tecumseh. The economy seems stuck in a "better, not good" mode, and rising raw material costs are going to be an issue again in 2012. But I am starting to stick my toe in the water with this stock and will be a scale buyer on company-specific or broad-market declines this year. There should be plenty of time to work your way into the stock in hope of an eventual business and price recovery. I can easily see this stock as a five-bagger over the next five years.

Sigh -- now it's time to go pack and head back to the real world.