Rubicon Technology ($RBCN) — Initiation (5/15/20)

Price: $8 Market Cap: $20m Valuation: 0.95x cash / 0.66x book value Category: OPTION

Background

Let’s Tarantino this quick idea with the “why own it” first:

  • As an $8 stock — trades below book value ($12 per share) AND cash on the balance sheet ($8.50 per share) — with no debt!
  • CEO Tim Brog has led and sold another small public company in the past — he joined Rubicon in March 2017
  • No significant cash burn despite having a very small operating business

This is one of those “option” bets which are typically negative EV, net cash, hidden asset, or other balance sheet “plays.”

Rubicon is an NOL shell company with an operating business (maybe even 2!) but a balance sheet is all you really need to understand what’s happening here:

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That’s right, $22m in cash, $30m in book value, and a $20m market cap. Here are the running cash balances since the current CEO took over:

2016 — $17.7m2017 — $18m2018 — $26m2019 — $24.2m1Q20 — $22.3m

They were able to successfully divest equipment, property, and assets of ~$11m with another $4m on the books today. Book value has held steady around $30-33m over the past 4 years — very impressive with minimal operating activities.

Here’s the profile of CEO Tim Brog from the Rubicon website:

Timothy E. Brog

Appointed as Chief Executive Officer on March 17, 2017. Mr. Brog has been a director of Rubicon since May 2016. From March 2015 until March 16, 2017, Mr. Brog, age 53, served as the president of Locksmith Capital Management LLC, an investment advisory firm. Previously, he served as chairman of the board of directors of Peerless Systems Corporation, a provider of software-based imaging systems, from June 2008 to February 2015, chief executive officer from August 2010 to March 2015 and a director beginning in July 2007. Mr. Brog is currently a director of Eco-Bat Technologies Limited.

Today, there are 4 pieces to the company:

  1. Cash on hand
  2. Assets held for sale
  3. Operating businesses
  4. Net operating losses (NOLs)

Cash, Assets, and NOLs

Cash and assets held for sale are pretty easy — they total $26m or $10.40 per share.

After Brog took over in 2017 they have not taken any impairments to assets held for sale (indicating the balance sheet value is probably a reliable figure).

The NOLs are fully reserved and therefore not recorded on the balance sheet — they total $61m or $24.40 per share. Should they come into a cash flowing business, they should have minimal taxes for years to come.

Operating Business(es)

Rubicon owns a sapphire crystal manufacturing business. This stuff was mainly used in phone screens and consumer products but it also has industrial applications. When Brog came in, he shuttered the consumer division and held onto the industrial business… The results are impressive, it went from a negative gross margin business to positive gross margins:

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And in Q1, revenue and gross profit actually grew over the previous year:

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I’m not going to argue this is a good business or has any significant value (it still doesn’t cover the ~$2.5m in annual SG&A), but I don’t consider it value destructive either. Also potentially a call option on continuing trends toward profitability.

What will they do with all the cash?

Remember, we have $22m in cash and a $20m market cap!

This is the question that leaves the stock in the OPTION bucket instead of elsewhere. While I trust Brog (and it is somewhat of a jockey bet), there is still a chance cash gets spent on money-losing acquisitions or investments…

Case in point — in 1Q20, the company had $1.8m in realized losses on investments (likely equity securities that tanked as COVID-19 came on).

Since 2017, cash has mainly been conserved with some buybacks — $65k in 2018, $540k in 2019, and $1.2m in 1Q20 (mainly in March). That totals nearly 10% of the market cap. As a bonus, all buybacks below book value actually increase per share book value so there’s extra incentive to buy below asset value.

The gameplan is first and foremost to acquire a profitable business — they have (sort of) started this with very very minimal outlays to pick up a failed direct-to-patient medication business:

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I was surprised to see that in 1Q20 they started to give some detail behind the optical sapphire business and the DTP pharmacy business:

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No idea what level of margins this will obtain but it has started generating revenue!

All we can do is wait to see how cash gets spent. But until then, asset values have been preserved and operating businesses are showing signs of life. Buybacks are helping as well. It helps that the CEO has a vested interest in a higher stock price too — with incentive comp tied to share prices in the $11-14 range…

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I’m willing to ride this one out and see what happens…