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Vicon Industries, Inc. (VII)

Vicon Industries, Inc. (AMEX:VII) is a designer and producer of video security and surveillance systems. It is currently has a market cap of approximately $18.7m, but has NCAV of $26m (Tangible BV of 34m) and no bank debt.VII has had a rough time during the recession, with revenues collapsing from an average of $17 million per quarter in the two years before the recession to lows of $11m earlier this year. At the same time, the company's gross margin eroded by more than 1,000 bp as the company cut prices in order to remain competitive as the industry entered a price war for the few remaining customers.

It appears now that the worst is over, as the following chart demonstrates.

This chart shows how 1Q2010 and 2Q2010 were rocked by the worst of the recessionary declines in revenue combined with the largest increases in SG&A and COGS (leading to the low Gross Profit margin). This demonstrates the somewhat fixed nature of VII's operations, which were unable to scale down as a result of the decline in revenues. 3Q2010 and 4Q2010 are now returning to more normal levels on all accounts, and the company has returned to profitability.

When Saj Karsan of reviewed the company earlier in the year (in the middle of 2Q2010), the company was trading at less of a discount to NCAV and there was a question of how long it would be before the company would regain profitability and get its operating expenses in order. Today, that picture is clearer, yet the company is trading at a larger discount to NCAV.

Earlier in the year, an EPV analysis was made difficult due to the ongoing losses and uncertainty about future earnings. Today, with margins and revenue return to more normal levels (though, admittedly, revenue has quite a bit to gain before it reaches pre-recession levels), an EPV analysis can be completed with a bit more certainty. My analysis results in a value of $6.00, which is a 45% premium to today's price. On an asset base, I mentioned above that the company has an NCAV of $26m (or $5.77/share) and tangible book value of $34m (or $7.55).

I should also note that Anita G. Zucker (who I believe is the widow of Jerry Zucker, owner of the Hudson's Bay Company of Canada) owns more than 10% of the company and has been increasing her stake in the company recently.

Talk to Frank about VII

Author Disclosure: Long VII.

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