Not investment advice – Just educational and informational – Make your research before investing
Tandy Leather
I got this idea from deepvalueinsight.com on Substack (I really recommend the original post). I agree that Warren Buffett would be very interested in this type of stock.
A quick overview of the company:
It’s a company with more than 100 years of history. It’s a retailer with physical stores selling leather products and tools for working with leather, serving both B2B and B2C customers. They operate in the USA, Canada, and have one store in Spain to serve the European market.
When we analyze the company using NCAV and Tangible Book Value, it clearly looks undervalued:
If we look at this simple table, the latest Balance Sheet on the right shows a potential revaluation over NCAV of 30% and a Tangible Book Value of 120%. That looks pretty good, doesn’t it? However, I also made a simple estimate on the right, assuming the inventory could be liquidated at about 20%. Suddenly, things don’t seem so attractive anymore.
What’s the problem?
The company’s assets depend heavily on inventory, and I’m not a big fan of that. In 2021, Tandy Leather was delisted from Nasdaq because they delayed reporting required data due to an inventory error, which is explained here [you can keep the link or reference as is].
Another issue is that the company seems to be winding down. Their EBITDA is decreasing every year, and it looks like they’re restructuring. I’m not comfortable with their past problems and the strong margin compression.
For these reasons, I’d rather avoid this company and not invest in it. Yes, I know these “Cigar Butt” companies are often misunderstood, but I’m not confident this one can close the gap..
Deswell Industries
I found this company, Deswell Industries, on the Deepvalueinsight Substack (Link). It’s a Chinese company with segments: plastic injection, tooling, and molding, and electronic and manufactured product development. It’s headquartered in Macao, operates in Dongguan, China, and is legally incorporated in the British Virgin Islands.
My advice: first, read the original post, then come back to this.
At first glance, this company seems really boring:
- It doesn’t grow.
- It depends on a small number of customers.
- The website looks like it’s stuck in 2010, and parts of it might even be hacked.
Could it be a scam because it’s a Chinese company? Don’t worry—it’s been listed on Nasdaq since 1995, so there’s a lot of history. (Note: Michael Burry bought shares in the company on August 15, 2000, as shown in this document).
But there are two strong points:
- The company pays a dividend every year, with a current dividend yield of 9.2%.
- It has zero debt and holds a large amount of cash and marketable securities.
If we value the company using only its Balance Sheet and assume the inventory is worth 0% in liquidation, we get the following (in three different scenarios):
The potential upside for Deswell Industries ranges between 28.0% and 77.8%.
I know this type of investment usually needs strong free cash flow (FCF) or net income to support such a revaluation. To analyze the company, I created a simple scenario where revenues decline by 10% each year (very pessimistic!) and margins stabilize at 3%. I applied a 3x P/E ratio and 3x market cap-to-FCF ratio, added an 8% dividend yield, and assumed the company uses its cash to pay the dividend:
Using these low multiples and a steep revenue decline, we still get a high intrinsic value. This model works well for companies with a net-cash position, using this formula: (Net Income (or FCF) * Multiple) – Net Cash.
To explain further, I opened a 3.5% position in Deswell Industries at $2.19 USD. I believe the company won’t be heavily impacted by tariffs since only about 10% of its revenues come from the USA. I also modeled a scenario where revenues decline by 10% each year, not just once.
hi