NOOF reported first quarter earnings this past week, and turned in a solidly profitable quarter, after suffering through two write-down plagued years.

Financial Highlights

Revenues were flat compared to the same quarter last year, coming in at approximately $12.5m. Margins took a hit, primarily due to higher costs in the Film Production segment, causing net income to fall 33%.

It was an unusual quarter from a cash flow basis, as NOOF actually used cash in operating activities.

As opposed to its traditional TV business, the company pays for the upfront costs in its Film Production segment, only to recoup the money later once the finished product is delivered.

Under this arrangement, the company has approx. $5.3m in cash that should be collected in the next few quarters.

While this strategy entails risk (NOOF might have to absorb the costs if the end customer doesn’t end up paying), the company’s balance sheet is very strong, with $14.1m of cash on hand along with an unused $4m credit line.

Domestic Growth?

Domestic sales – still the vast majority of NOOF’s revenues – are still showing the effects of the economic downturn. However, the company seems to be working hard to address these challenges by testing new initiatives in several test markets.

According to the CEO,

“We believe these results indicate that improvements in category results are achievable. If operators choose to roll-out these new products across their platforms and do so quickly, our financial results could benefit on both a near-term and long-term basis.”

International Growth Opportunity

For future prospects, the international market holds the key to NOOF’s future.

For the quarter, international revenue doubled in the Transactional TV segment, and on August 3rd, the company announced that it entered into a five-year license agreement to rebrand and distributed three new channels throughout Europe, the Middle East, and areas of Northern Africa.

The new channels are expected to reach over 49 million unique homes and are an entirely new revenue opportunity.

Even better, there is much less consolidation internationally among operators. According to the CFO, NOOF can expect much higher margins with these agreements as compared to the domestic market (30-50% as compared to 10-15% domestically).

Institutional and Insider Ownership

During the quarter, NOOF also filed its DEF14A for the year.

The stock remains popular with several institutional firms and hedge funds, with several investors holding a large stake in the business.

While several funds have trimmed their holdings slightly over the past year, a brand new investor – Robeco Investment Management – picked up a 7.6% stake.

In addition, company insiders have increased their ownership in the business to 10.3%, an increase of 2.6%.

Increased ownership by both investment management firms and insiders is an encouraging sign, as other investors (and insiders!) believe the company’s prospects are positive going forward

Conclusion

By most any measure, the stock remains extraordinary cheap:

• Price/Sales – 0.62
• Price/Book – 0.60
• Forward P/E – 5.4

Although some might argue that long-term prospects for the business are challenging, NOOF certainly has big plans:

“we expect to increase our distribution to over 300 million worldwide network homes, representing an increase of approximately 40% over our current distribution.”

With hoards of cash, a solid balance sheet, and potential growth both domestically and internationally, NOOF should increase from its current lows.

Disclosure

Long NOOF

Check out my last post on SPAN’s 2nd Quarter Earnings.

After announcing a sizable special dividend last quarter (and an overall bullish report), Span-America Systems, Inc (SPAN) followed by reporting fiscal 3rd quarter results last week.

After an initial glance at the financials, it was a tough quarter and the price took a corresponding dive. Despite the quarterly volatility, the stock remains significantly undervalued.

Q3 Results

Quarterly revenue and earnings dropped 8% and 17% respectively, as the company reported lower sales volume across each business segment.

The majority of the decline occurred in the consumer sales division (down 19% and part of the custom product segment), due to a market test program last year that was halted for 2010.

Without the effects of the test program, the division would have actually reported a sales increase.

Quarterly Cost Fluctuations

Although the company has done a great job of streamlining its manufacturing process to control and trim costs, quarterly earnings can still be affected by unavoidable changes in administrative expenses.

Example:

As of April 3, SPAN owned a $1.9m life insurance policy for its founder and former chairman. This policy is invested in mutual funds and fixed income contracts, and therefore exposed to fluctuations in equity markets and interest rates.

According to the company,

“The cash value decreased by $71,000 in the third quarter this year compared with a $68,000 increase in the third quarter last year. The $139,000 swing in cash value was the primary factor in administrative expenses rising 16% compared with the prior year’s third quarter.

Excluding the effect of the changes in cash value for both quarters, administrative expenses would have declined by 2% in the third quarter”

As with all stock investments, these short-term fluctuations can impact the stock price on a given day or quarter, but longer-term (where value investors focus), the business fundamentals and intrinsic value should win out.

YTD Financials

Despite the rough quarter, net income for the year was up 8% to $3.3m as the company continues to focus on controlling costs.

Going into the fourth quarter (usually the company’s strongest) SPAN is still on-track to produce its best FCF and earnings year in history.

Capital Goods vs. Consumables

The company’s product mix includes a mixture of capital goods (such as therapeutic support surfaces) and consumables.

As in most recessions, the recent economic downturn has forced many businesses to delay investments in capital equipment.

These delays have affected SPAN’s quarterly numbers, but longer-term, this scenario should lead to pent-up demand as the economy turns around.

“We believe this is due to economic pressures facing our customers over the short-term and should result in higher future demand as customers eventually replace and upgrade therapeutic support surfaces in their facilities.”

Investing in the Future

The company continues to invest in expanding its product line, with several new products rolling out in the fourth quarter.

I’m particularly interested in SPAN’s new high-end therapeutic support surface for the acute care industry, as this market reported significant growth across a number of product lines in the third quarter.

Outlook

Management has managed to control costs nicely, and seems to have positioned the company for a strong end to the year.

According to Jim Ferguson, SPAN’s CEO:

“We expect to report improved operating results in the fourth quarter compared with the third quarter. Our fourth quarter usually outperforms the first three quarters based on seasonal sales trends. We believe our consumer sales will grow due to a new program with a large retailer, and our industrial business should benefit from the expanding manufacturing activity in our region.

Q4 should be a big quarter for SPAN.  Mid to long-term investors should be rewarded as SPAN’s stock price rises to meet its intrinsic value.

Disclosure

Long SPAN

After dropping 5.25% during the month of June, the S&P came back to gain 7.31% in July. The ValueUncovered portfolio turned out a positive month as well, although it did lag the broader market.

YTD Performance

Earnings Roundup

July was a popular month for quarterly earnings, as several stocks reported results.

Iteris (ITI) reported solid earnings, with net income increasing 450% from the prior year quarter. Although Acme United (ACU) also reported a positive increase in profits, the jump was due largely to a one-time tax gain from 2009.

Both remain more than 30% below my estimate of intrinsic value.

Special Situations

The biggest worry in the current portfolio is the negative developments surrounding the EMMS going private transaction. While the recent judicial verdict was positive news, the deal remains on shaky footing, and the stock has dropped almost 10% over the past month.

EMMS’s CEO, Jeff Smulyan, needs to quickly come up with an agreement with the preferred shareholder group, as continued delays will lead to nervous financial backers and the deal potentially falling apart all together.

I will be monitoring the situation very closely.

2010 2nd Half Outlook

I’ve continued to screen for businesses selling at a discount to intrinsic value, but haven’t found many attractive opportunities.

I’m content to wait for the market to turn around, and will be aggressively pursuing special situations investments to round out the portfolio.

Disclosure

Long ITI, ACU, EMMS