We examined ownership reports filed with the SEC for companies where Mr. Douglas was a 10% beneficial owner. We excluded Stamps.com (STMP), where Mr. Douglas was a director, and EnteroMedics (ETRM), which is a new investment. We found the following investments:
- IMAX Corporation (IMAX). Between April 2007 and May 2008, Mr. Douglas acquired 8.6M shares at prices ranging from $4 to $7.22 per share. He sold 0.9M shares in November 2010 at $21.87 - $22.75. The current IMAX stock price is $34.24. We estimate the total return on this $50M investment at 6x within 3.5 years, or a CAGR of 67%.
- Westport Innovations (WPRT). Between February and July 2010, Mr. Douglas acquired 7.5M shares at prices ranging from $12.95 to $19.36. The stock currently trades at $24.89. We estimate the total gain on this $112M investment at 60% in 1 year.
- Rural Cellular Corp. Between July and September 2005, Mr. Douglas acquired 1.8M shares at prices ranging from $7.19 to $12.02 per share. Rural Cellular was acquired by Verizon for $45 per share some 2 years later (announced in 2007, the acquisition closed in August 2008). We estimate Mr. Douglas' gain at 5.8x on this $14M investment, and CAGR at 25%.
- Friendly Ice Cream Corp. Between July and November 2004, Mr. Douglas acquired 0.8M shares, at prices between $7.74 and $12.28. The company was acquired in June 2007 for $15.50 a share, translating into a 25% gain on the total investment of $10.5M over 3 years, leading to a sub-par CAGR of 8%.
- Hansen Natural Corporation (HANS). Between June 2003 and January 2004, Mr. Douglas acquired 0.3M shares at an average price of $0.58. With HANS currently trading at $69.62, his relatively small investment of $190K has grown more than 100 fold, or a CAGR of some 80%.
AMSC is currently priced below the Book Value of its equity ($9.86). The company has been modestly profitable since 2009, most recently generating a return on equity (ROE) of 10%. We should note that the longer term history of AMSC is that of over a decade of consistent losses:
How big of a loss can one expect? AMSC announced that the annual revenue may drop from $430M to below $355M. The company has a gross margin of about 40%, so the $75M+ drop in revenue can translate into a $30M+ drop in operating income. The company is reviewing at least $56M of already recognized revenue, which is not surprising as its accounts receivable jumped to $114M as of December 31, 2010, from $49M a year earlier. A reduction in the income tax expense could partially offset the loss, perhaps by $10M or so. Overall, we guess that the net income could drop by anywhere from $20M to $50M. In fiscal 2010, the net income was $16M. A $4M to $34M loss in fiscal 2011 could reduce the book value by $0.09 to $0.75 per share. The company has delayed the 10-K filing due at the end of May, as it is reviewing revenue recognition, so it may be some time before we find out the extent of its problems.
We should note that AMSC has a strong balance sheet with $500M in equity out of $640M in total assets, and almost no debt. Goodwill and intangibles are small at $53M, and there is $240M is cash and securities. At the same time, the company is in the process of a $265M acquisition of The Switch Engineering company, expected to close in August, which is certain to result in further dilution at this difficult time.
To quote Warren Buffett, "Time is the friend of the wonderful company, the enemy of the mediocre." So, we normally prefer to invest in companies with strong records of long-term profitability and compounding, to have time on our side. AMSC is certainly not one of them. However, given the attractive price close to book value, a strong balance sheet, and a vote of confidence from Kevin Douglas, we see AMSC as an attractive speculative opportunity.
Disclosure: long on AMSC.