Tecumseh products

I wrote an article on Tecumseh Products that was accepted by Seeking Alpha on Feb 05, 2013. I decided to add the same content in my blog as well. So here it is:

Tecumseh Products Company (TECUA) is a special situation investment. The company announced on Jan 21, 2013 that Kent Herrick, Chairman and great-grandson of company founder Raymond Herrick is resigning. The company press release stated that Kent’s resignation was “driven by the pace of the strategic decision making by the Company”. A couple of days later, on Jan 23, 2013, the company announced that it was exploring strategic alternatives including an outright sale of the company. The same press release also noted that they had retained Sagent Advisors, LLC, which “the Company engaged to explore various strategic alternatives, including the possible sale of the Company”.

In this context, it is important to note that activist investor Roumell Asset Management , which disclosed  a 20%+ stake and filed a 13-D in May 2012, has been pressing the company to divest non-core assets – particularly a manufacturing facility in Hyderabad, India and a plant in Brazil. Roumell noted in its latest filing that the 55 acres of land held by the company in Hyderabad, India could be worth $67 million “after applying a large track discount with an immediate sale focus”.  Per their 13-D, Roumell commissioned “a leading worldwide real estate brokerage firm with offices in Hyderabad” to arrive at this number. Having grown up in India and having followed the real estate market in India for over 30 years, I can confirm that this valuation is not “pie in the sky optimism” and, as Roumell noted, the land could fetch even more if broken up and sold in parcels. This is just the Hyderabad property we are talking about here. I have not even brought up Tecumseh’s holdings in Haryana, India or its Brazilian plant. To put this in context, the company has a current market cap of $131MM and tangible assets on its balance sheet of $285 million. It is important to note that in this $285 million number, the value of “Land and land improvements” is held at $13.8 million. That is right folks. ALL the land held by the company in Brazil, India and other countries is held at a mere $13.8 million!!

From the company’s 10-K:

“We maintain manufacturing plants in the United States (“U.S.”), Brazil, France, and India as well as assembly plants in Canada, Mexico, Malaysia and a joint venture in China”.

This confirms that the company has real estate assets in multiple countries.

In addition, the company has $393 million worth of tax loss carry forwards that is not being reflected in this tangible asset number.

So it is safe to say that the value of the tangible assets is WAY NORTH of $285 million. The company WILL find a buyer. It is not a question of “IF” but when.

The stock rallied 19.45% to close at $7.06 on the news and has been trading around the $7.1x level since then. But I would like to make the case that the real rally is yet to come. And it has to do with two main themes. They are “Housing” and “Mergers and Acquisitions (M&A)” outlook.

Housing:

Housing is showing signs of a slow but steady recovery.  As of Dec 2012, 300,000 construction jobs were added since the Great Recession according to various sources. Of this number, 100,000 were added in the last four month of 2012 alone.  There are other signs of a slow but steady housing recovery all over the US. A respected investor with 30 years of successful investment experience in the Atlanta real estate market told me that he has never seen the market “this good” since 1998! He has seen multiple real estate market crashes dating back to the 70’s. This recovery in construction could provide a boost to the company’s household refrigeration business here in the US and to the company’s valuation as a whole.

M&A Activity:

The Fed has pledged to keep interest rates low till unemployment touches 6.5%. It could take us a few years to get to that number. Certainly, nobody is expecting us to hit the 6.5% number in 2013. This low interest rate environment combined with a resurgence in structured finance means that 2013 promises to be an even better year for M&A’s than 2012 was. This is not just my opinion. Two of Atlanta’s most prominent Private Equity investors told me so in talks I attended.

What does all this mean for Tecumseh?

First and foremost, the company’s Enterprise Value will show a significant increase as revenues and margins improve. This is a double positive because, this means that the company is

a)      Increasingly likely to find a buyer for its Brazilian and Indian assets or for the company as a whole

b)      The combination of margin expansion and increasing revenues may return the company to profitability. Given that the company has $393MM worth of tax loss carry forwards on its books, all this future profit will be tax free.

It is rare to find a special situation investment that is trading at a third of tangible book value. Tecumseh is one of those rare gems. To paraphrase Warren Buffet, TECUA is a “one-foot fence”. However, the opinions expressed in this article are just that and I urge everyone to do their own due diligence.