Acme United Corp (ACU), a supplier of cutting, measuring and safety products, reported 2nd quarter results this week. ACU is another small undervalued stock in a boring business line that has been overlooked by the market.

The stock was hit hard during the recession, and is slowly starting to regain its 2006-2008 levels.

Sales Analysis

For the 2nd quarter, ACU reported $20.2m in revenues, a 7% increase from the prior year, and the second highest revenue quarter in company history.

Growth was driven by the company’s European segment, as sales increased 64% vs. a 1% increase in the domestic market.

Impressive growth? Sure…

But European sales accounted for only 12% of total revenue last year and didn’t record a profit.

Turning in a profitable year for the European segment could be one key to to the company’s growth going forward, especially if U.S. sales continue to lag.

Adjusted Earnings

Net income jumped 17% from the year ago quarter, but this increase was driven largely by a tax benefit related to a land donation transaction back in Dec 2009.

ACU - Q2 Net Income Adjustments

Adjusting for the lower tax rate, net income dropped 10% for the quarter.


Despite the business struggles, management continues to deliver value to shareholders in other ways.

The company has increased the cash dividend for five straight years, and paid a dividend going back to 1990. The stock currently yields 2%.

The company is also aggressively buying back shares – 241k in the past twelve months (7.1% of outstanding). Another 83,376 shares are still available under the current repurchase program.


My original analysis of ACU back in January assigned a value of $17-$19, but the business has not bounced back as quickly as I hoped.

Even with conservative assumptions, the company is still trading at a substantial discount to intrinsic value:

ACU - Stock Valuation - July 2010

I’m revising my estimate of intrinsic value to $14-$16.


Since U.S. sales make up the vast majority of revenue, ACU’s future outlook is heavily dependent on the domestic economy.

Historically, the 2nd and 3rd quarter are the most profitable for ACU’s business, so the next earnings release will be good barometer for my future decisions with this stock.


Long ACU

Iteris, Inc (ITI) has been a Value Uncovered holding since March, and just announced results for its fiscal first quarter ending on June 30, 2010. .

Iteris sells traffic management technology and services to the trucking industry, a tough business to be in during 2008 and 2009. Encouragingly, the past two quarters continue to show positive signs of a turnaround.

Sales Highlights

Sales increased 7.1% from the same quarter last year, driven by substantial increases in the company’s main product segments – a 30.9% increase in Roadway Sensors and 67.2% increase in Vehicle Sensors.

These increases followed double-digit revenue growth in the previous quarter, a very positive sign.

Transportation Systems (contract) revenue continued to decrease, but at a much slower pace than last quarter.

Overall, I believe product revenues are much more important indicators for the company’s future outlook.

Margins & Income

ITI Q1 Margins

Overall, gross margins increased 6.7% to 44.8%, much closer to the company’s long-term average.

Net income increased over 450% for the quarter, jumping to $797k from $144k in the previous quarter.

I will be watching the cash flow numbers closely after the 10-Q is filed, but I estimate quarterly owner earnings to be around $0.8M, a substantial increase from the same time last year.

CEO Remarks

“I am encouraged with our financial performance for the quarter, and believe we are beginning to see the positive impact of the initiatives we put in place during the last year, such as expansion of our R&D efforts and an increase in sales and marketing activities…This quarter reinforces my confidence that we are on the right path.”

Business Outlook

Management seems very bullish on the business going forward. The company continues to invest in new product lines, expanding the scope and breadth of its offerings.

The balance sheet is solid with $11.7m in cash plus an untouched $12m line of credit.

ITI was not able to utilize its NOLs in 2010 due to deteriorating conditions and uncertainty over future profits.  Since the business outlook seems to have improved substantially, some of these tax assets should be realized in fiscal 2011.


I will revisit my valuation assumptions at the halfway mark of the year, but by most any measure, Iteris appears extremely cheap – ITI was recently profiled at Old School Value as well.

Even using the recession-depressed numbers from 2009, the company seems to be worth a little over $2. If conditions continue to improve, I think the stock could rise closer to $4.

Despite the seemingly positive report, ITI’s stock price has dipped, providing a nice buying opportunity.


Long ITI

In workouts and special situations, the goal is to invest in ‘sure-things,’ where all or most of the conditions for the transaction are satisfied, but yet the market still offers an attractive spread.

In the case of the EMMS going private transaction, it appears I jumped the gun with my initial investment, as recent news has substantially changed the details of this investment.

Shareholder Approval

The deal is subject to both common and preferred shareholder approval. The common share vote is assured, as the Company’s Chairman & CEO, Jeff Smulyan, already owns 60% of outstanding shares.

For the preferred vote, a 2/3 majority was needed. Since Alden Capital Management, the company providing the financing for the transaction, owned 41% of preferred shares, I thought that preferred vote was likely as well.

Turns out I was wrong.

Preferred Shareholder Lockout

On July 9, a group of preferred shareholders led by Geoffrey Raynor and Daniel Loeb filed a lock-out agreement to vote against the proposal. In total, the group holds more than 33% of outstanding shares, effectively blocking the transaction.

Under the current agreement, preferred shareholders are being offered new bonds at a 60% discount to the face value of $50 per share.

Based on the 13-D filings, Loeb and other investors recently picked up preferred shares around $20 – from my reading, they do have upside under the current offer already.

Although the purpose of the lockout has not been disclosed, it seems that the group of investors sees additional upside in the preferred shares, and will likely lobby for Smulyan to sweeten the conversion ratio.

The lockout is expected to expire on September 30 unless an agreement is reached.

Common Shareholder Lawsuits

Also troubling, is that an Indiana court judge still needs to rule on the common shareholder lawsuits that have been filed regarding the transaction. On Monday July 19, the judge heard arguments for a preliminary injunction to block the transaction. According to the plaintiff’s lawyers:

“We’re not arguing the price. What we’re saying is that people should have the right to make a fully informed decision on whether they like the price.”

On the other side, EMMS’s lawyers argued that Indiana state law prohibits common shareholders from blocking these type of transactions.

The judge expects to make a ruling by the end of this week.

Another lawsuit suggests that the Company, despite several amendments to the proxy filing, still hasn’t fully disclosed all material information about the transaction.

Lessons Learned

From an investing standpoint, one big lesson is to be aware of shareholder lawsuits. The legal world can be tough to understand, and it brings along a great deal of uncertainty and roadblocks to any transaction.

These types of lawsuits seem to pop up at the beginning of every merger, but are usually quickly settled – in this case, the transaction has continued to linger.

Although it would be difficult to anticipate the preferred lockout, lawsuit problems can be avoided by just waiting for the final ruling before making an investment.


In reality, if common shareholders are forbidden to block these types of transactions under Indiana law, the lawsuit doesn’t seem to have much merit, and should hopefully be dismissed this week – although some risk certainly remains.

Positive Spin

I don’t think Loeb and the other preferred investors are trying to block the transaction outright, as it appears like EMMS has few other options for restructuring or unlocking value.

In addition, Smulyan has a heavy financial interest (since he owns 60% of common shares) in this merger, and has already tried and failed to take the Company public back in 2006 – meaning he has a vested interest in seeing this merger go through.

Negative Spin

The Indiana judge could rule that common shareholders are allowed to block the transaction (a setback, even though the preferred lockout has accomplished pretty much the same task).

Preferred shareholders demand the higher payout, but Smulyan cannot get approval from Alden Capital to raise the price.

With the deep decline in other radio stocks over the last few months, Smulyan might decide the price is too high and walk away from the transaction – again.


-Do you think the transaction will go through by August 3?  At all?

-What outcome are the preferred shareholders hoping for?

-Sell or hold?

At the time of this writing, I still hold a small position in EMMS.  I will be closely monitoring the results of the shareholder lawsuits, along with the negotiations with the preferred shareholders – if there is a substantial change on either front, I’ll have to sell at a loss.


Lockout Agreement

Jeff Smulyan Facing Emmis Options

Judge Hears Arguments Challenging Emmis Sale

Another Lawsuit over Emmis

*Update – 7/27/10

The Indianapolis Star is reporting that the honorable Judge Robyn Moberly has decided to deny the petition from common shareholders to block the proposed going private transaction.

Smulyan still faces a class action lawsuit in NY and must work out a deal with the preferred shareholder lockout group, but this is a definite step in the right direction.

*Update – 08/04/10

The EMMS tender offer was supposed to wrap up yesterday.  With no news from management as it neared the deadline, the market grew increasingly concerned, with the stock dropping more than 15% on Monday and Tuesday.

However, EMMS jumped more than 30% today on news that the tender offer would be extended until close of business on Friday, August 6.

Smulyan and the preferred shareholder group are still negotiating a deal to end the lockout, including a possible alternative structure:

“that would still allow a tender offer for the Class A Common Stock to proceed without any changes to the terms of the Preferred Stock and without an offer by Emmis to exchange the New Notes for the Preferred Stock”

This looks to be extremely positive news for Common shareholders.  If an alternative structure is approved, the common offer can proceed as planned, while also removing the risk of having to refinance the deal due to increased financial consideration.

Also, a two day extension seems to indicate that the negotiations are close to completion.  It would be a little embarrassing for Smulyan to postpone the date again after only two days, especially since the outside date for the transaction is set for Sept 24.

I think it’s highly likely that shareholders will receive a decision on Friday.