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Hirsch International A Good Pick In A Recovery

Posted: Oct 02, 2008 16:32 PM by Eric Fox

Tickers in this Article: AVTR, GLW, F, CRC, HRSH

Hirsch International Corp (Nasdaq:HRSH) reported weak earnings last quarter, but its excellent balance sheet and valuation below net current asset value might make it a good pick to play in a recovery. (Be sure to read Fundamental Analysis: A Brief Introduction To Valuation to learn of several techniques to value a company.)

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Hirsch International distributes commercial embroidery machines, screen-printing equipment, parts and related software to the apparel industry. The company has its main distribution agreement with Tajima Industries and smaller agreements with two European manufacturers. Most company sales are of embroidery machines manufactured by Tajima, which can cost up to $150,000 each depending on the capacity.

Ugly Earnings
The last earnings report for Hirsch International was not pretty, as the company lost 11 cents per share because of slowing sales due to "…a 31% decrease in revenue in our legacy embroidery segment over last year’s first half," said Paul Gallagher, president and chief executive officer of Hirsch International. Revenues fell 16.4% from the same quarter last year.

Gallagher also cited overall weakness in the economy.

"It is evident that we are operating in a difficult economic environment with declining consumer confidence," he said. "Beginning in 2007 and continuing in 2008, we have seen overall weakness in capital expenditures throughout the graphic and decorated apparel industry."

Good Balance Sheet
One good aspect about Hirsch International is its excellent balance sheet. The company ended Q2 on June 30 with cash of $10.7 million and no debt. Investors should note that $2.4 million of the cash is restricted and supports a letter of credit agreement to back its equipment purchases from Tajima. Excluding the restricted cash, the company has 88 cents in cash and sells for $1 per share. (Read Analyze Cash Flow The Easy Way to learn how a company spends its money and whether there will be any left for investors.)

This balance sheet causes the stock to trade below net current asset value, which is calculated as the total amount of current assets minus total liabilities. If we use data as of the end of Q2, we get a net current asset value of either $1.80 or $1.55 per share depending on whether you exclude the restricted cash from the numerator. The stock is selling at $1.

-	Total Cash	Excluding Restricted Cash
Current Assets	$27,058,000	$24,655,000
Total Liabilities	$ 9,947,000	$9,947,000
Net Current Asset Value	$17,111,000	$14,708,000
Net Current Asset Value Per Share	$1.80	$1.55

The idea behind the net current asset value is that the company can be liquidated by selling all current assets and using the proceeds to pay off all liabilities, leaving a large amount left over for shareholders. The concept was popularized by Benjamin Graham, who thought it provided a margin of safety to investors when buying a stock. Graham advised purchasing at two-thirds of a company’s net current asset value. Other stocks selling below a company's net current asset value include Chromcraft Revington (NYSE:CRC) and Avatar Holdings (Nasdaq:AVTR).

Loss Of Exclusive Equipment Distribution Would Be A Blow
Investors in Hirsch International should be aware that the company received 72% of its sales in 2007 from Tajima equipment distribution, which is governed by two marketing agreements. One has already expired and is being renegotiated, and the other expires in February 2011. If the second agreement is not renewed, the company would lose its exclusive right to distribute Tajima equipment in 39 states.

Other industrial companies have suffered from slowing demand as the economy has cooled in the last year, including Corning (NYSE:GLW), which reported a slowdown in sales of Liquid Crystal Display (LCD) glass, and Ford Motor Co. (NYSE:F), which was hurt by the slowdown in auto sales.

Bottom Line
Hirsch International’s good balance sheet and low valuation make it a good way to play a rebound in the industrial economy.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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