Let's Make a Deal!

I wanted to discuss a few recent "deals" today. I do believe that the fact that M&A is ongoing is critical to MFI doing well as it seems to get a disproportionate percentage of the deals.

KTII & HI - This is actually a merger of two stocks that have been on the lists in the past year (Casket Maker Hillenbrand to Diversify With K-Tron). KTII joined my top 50 mechanical portfolio on February 28th, 2009 and is up a snappy 167%. Hillebrand is not in my mechanical portolios, but is a nice steady well-run company that has been in some of the higher cap stock screens that I do not follow closely. KTII went up about 30% on the bid. Sadly, I am not a KTII stockholder.

CF & TRA - this is a merger attempt that was discontinued today between two common MFI stocks (CF Withdraws Terra Bid; Agrium Steps Up Efforts). CF has been bidding for about a year on TRA, back when I owned TRA about a year ago at $14 (CF bid $20). CF was able to get three directors added to the BOD, but the final price north of $40 was rejected and CF finally said "enough is enough". It may likely work out very well for me. CF actually made a large capital gain on their "investment" in TRA and that should bolster the balance sheet. Then with stockholders relieved that CF wasn't going to do anything stupid, the stock popped 5% after hours today AND AGU is still going forward with their bid of about $109 (CF closed at $93.19 before the 5% pop). I do own CF.

The third "deal" is intriguing and in my opinion an excellent opportunity for investors. TRMS is a stock that was in my mechanical portfolio and hit its one year anniversary at the end of December, up 154%. I noticed today that they were back on the top 50 screen since December of 2008, so if they stay on the list over the weekend, they will be a "new" mechanical stock as it has been more than a year. They were to be bought by a Korean company last November at $3.80 (they are about $2.45 today), but the deal fell through due to lack of financing (per the press release (Arigene Nixes Trimeris Offer, Cites Lack of Funding).

This caused me to look a bit closer at TRMS and I found them to be very intriguing (so much so that I bought some today). First, here are the raw numbers that places them on the list:

		trms
+	Operating Income After Depreciation	2.66
-	Minority Interest - Income Account	-
=	Income for Calculation	2.66
	Diluted Shares Outstanding	22.320
	Share Price	2.42
+	Market Cap Calc	54.01
+	Preferred Capital	-
+	Debt in Current Liabilities	-
+	Long-Term Debt	-
	Cash and Short-Term Investments	35.62
-	Excess Cash	35.62
=	Enterprise Value	18.40
+	Property Plant and Equipment - Net	-
+	Receivables	3.06
+	Inventories	-
+	Other Current Assests	0.13
+	Working Cash	-
-	Accounts Payable	0.27
-	Current Liabilities - Other	1.32
=	Invested Capital	1.59
	Earnings Yield	14%
	ROIC	167%

Now, let us begin to tweak a little bit. First, if you read the link about TRMS being jilted, you'll see that they will get a $12m payment. For a company with a $54m market cap, that seems huge to me. If we assume they keep $9m and pay the rest to Obama, then here is how their ratios change:

		trms	trms
+	Operating Income After Depreciation	2.66	2.66
-	Minority Interest - Income Account	-	-
=	Income for Calculation	2.66	2.66
	Diluted Shares Outstanding	22.320	22.320
	Share Price	2.42	2.42
+	Market Cap Calc	54.01	54.01
+	Preferred Capital	-	-
+	Debt in Current Liabilities	-	-
+	Long-Term Debt	-	-
	Cash and Short-Term Investments	44.62	35.62
-	Excess Cash	44.62	35.62
=	Enterprise Value	9.40	18.40
+	Property Plant and Equipment - Net	-	-
+	Receivables	3.06	3.06
+	Inventories	-	-
+	Other Current Assests	0.13	0.13
+	Working Cash	-	-
-	Accounts Payable	0.27	0.27
-	Current Liabilities - Other	1.32	1.32
=	Invested Capital	1.59	1.59
	Earnings Yield	28%	14%
	ROIC	167%	167%
	EPS Diluted	22.32	22.32

So the cash doubles the earnings yield (which I would expect to put it back in the top 25). But as our friend Dr Seuss tells us, "it is fun to have fun, but you have to know how..." there is still more. Most MFI companies get the majority of their income from "operating earnings". Other income (which is generally things like investment income) is excluded from the calculation. And you can see from above that TRMS has 2.66m of operating earnings in the past twelve months, which drives the 28% earnings yield. BUT when I looked at the income statement, they have the 2.66m in past 12 months and an additional 8m (!!) of Non Operating income. I did a little digging to see what this money is and it is royalties (I think from Roche - see the 6,251 below in the 9 month column).

Three Months Ended September 30,								Nine Months Ended September 30,
	2009				2008				2009				2008
Revenue:
Milestone revenue	$	67			$	67			$	199			$	199
Royalty revenue		2,141				3,373				6,251				8,663
Collaboration income [1]		1,702				1,756				5,555				6,154
Total revenue and collaboration income		3,910				5,196				12,005				15,016
Operating expenses:
Research and development		-				367				-				2,923
General and administrative		1,669				1,519				4,805				5,778
(Gain) loss on disposal of equipment		-				(10	)			(23	)			496
Total operating expenses		1,669				1,876				4,782				9,197
Operating income		2,241				3,320				7,223				5,819
Other income (expense)
Interest income		59				397				338				1,756
Gain/(loss) on investments		241				(15	)			298				(703	)
Interest expense		(64	)			(96	)			(192	)			(285	)
Total other income (expense)		236				286				444				768
Income before taxes		2,477				3,606				7,667				6,587
Income tax provision		833				47				2,612				110
Net income	$	1,644			$	3,559			$	5,055			$	6,477

To me this is clearly operating income, even if Fidelity and Compustat have it as "non operating income". If we move it there, then TRMS gets extremely high MFI scores:

		trms	trms	trms
+	Operating Income After Depreciation	10.70	2.66	2.66
-	Minority Interest - Income Account	-	-	-
=	Income for Calculation	10.70	2.66	2.66
	Diluted Shares Outstanding	22.320	22.320	22.320
	Share Price	2.42	2.42	2.42
+	Market Cap Calc	54.01	54.01	54.01
+	Preferred Capital	-	-	-
+	Debt in Current Liabilities	-	-	-
+	Long-Term Debt	-	-	-
	Cash and Short-Term Investments	44.62	35.62	44.62
-	Excess Cash	44.62	35.62	44.62
=	Enterprise Value	9.40	18.40	9.40
+	Property Plant and Equipment - Net	-	-	-
+	Receivables	3.06	3.06	3.06
+	Inventories	-	-	-
+	Other Current Assests	0.13	0.13	0.13
+	Working Cash	-	-	-
-	Accounts Payable	0.27	0.27	0.27
-	Current Liabilities - Other	1.32	1.32	1.32
=	Invested Capital	1.59	1.59	1.59
	Earnings Yield	114%	14%	28%
	ROIC	672%	167%	167%
	EPS Diluted	22.32	22.32	22.32

Pretty eye-opening! You have a company with a market cap of 54m, 44m of cash and a trailing 12 month operating income of $10.7m. Wow! I might even buy more tomorrow. I suspect that at the very least they'll pay some whomping dividends with all the excess cash (they paid a special 50 cent dividend about a year ago) and I also think there is still a strong likelihood of a second suitor, as they'll get the $12m kicker (the $9m adds 40 cents a share) in addition to a company someone was willing to pay $3.80 a share for.

Footnote: I did read part of their recent 10 Q (http://www.sec.gov/Archives/edgar/data/911326/000119312509232805/d10q.htm) and it did dampen my enthusiasm a bit. I still think they are a decent buy given all the cash. But they are a one trick pony, entirely tied to Fuzeon, a drug for fighting HIV Virus. It seems that other drugs are coming out which are causing sales of Fuzeon to drop... that could be the real reason the Korean company pulled out. So I will not add to my share, but I still think there is enough juice and value for TRMS to be a good buy at 2.42.