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Authentec a Deep Value Net Net in Deep Trouble

If you are unfamiliar with deep value investing and searching for net net's, it is a formula Ben Graham came up with and what Buffett calls cigar butt investing.

Net Net Definition

Basically, a net net is a company that is selling below liquidation value. That is, if the company was sold this instant, what would all of its assets minus its liabilities be worth.

The formula, known as Net Net Working Capital or Net Current Asset Value is:

Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) - total liabilities

You can get more detailed explanation as well as a free automated investment spreadsheet that calculates this for you from Old School Value.

Net Net Calculation

Let's take a look at the latest financial statements for AUTH.

AuthenTec, Inc. is a mixed-signal semiconductor company providing fingerprint authentication sensors and solutions to the PC, wireless device, access control and other markets. The Company offers a range of fingerprint sensors that enable users to access and control multiple functions on an electronic device by touching or sliding their finger across the sensor.

From their latest filing on May 15 AuthenTec had:

  • $54.1 million in cash
  • $6.8 million in short term investments
  • $3.1 million in accounts receivables
  • $4.6 million in inventories
  • $8.5 million in total liabilities
  • 28.6 million shares outstanding
If these numbers are then plugged in to the formula above, the liquidation price for AUTH comes out to $1.99. This is a discount of 12% to the price of $1.75 as of June 12.

Depending on how you feel about the company's capability to collect payments and turn over its inventory, the discounted percentage for accounts receivables and inventories can be adjusted.

Net Nets in Deep Trouble

So what does this mean? Well, it means that AuthenTec is currently trading very close to what you would expect to receive if the company was to liquidate. However, when I previously calculated the liquidation value in the previous quarter, the value was at $2.09. The value of the business is declining and it isn't surprising. The company operates in a commodity business where there is no moat without any competitive advantages.

Net nets are extremely cheap for a reason so it is very important to determine which ones are unduly punished or mispriced.

Authentec is the type of business that should be avoided. Even though it is cheap, it will probably get cheaper and the 12% discount is not at a wide enough margin of safety.

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