Here is a posting from Stephen Barnes on the Motley Fool. Would you care to comment?
Subject: Re: Simula converts
Date: Thu, Jan 8, 1998 11:15 AM
From: SBarnz
Message-id: <19980108191500.OAA18790@ladder02.news.aol.com>
Yo! Newbunch
<<Anybody here follow Simula? What do you think of the company and stock? Anybody know anything about the 8% 2004 convertibles trading at about 110? Ticker symbol?>>
Don't know the ticker, but I believe CUSIP is 829206ab.
I have a high regard for the company's (and thus, the stock's) long term potential. Unfortunately, I have developed a reasonable level of skepticism of the company's management. Chairman DesJardines appears to me to be a brilliant engineer, but limited in terms of business acumen. CEO Townsend has (IMO) appeared more-than-competent on many occasions, less so on others. The latest round of snafus has been particularly disappointing to me, although we
avoided some of the stock market's damage by exiting a substantial percentage of our position at the $19 to $20 point. There is little other than management error to explain the delays in government programs (which I believe to be manageable to some extent) and the poor ramp of 16g seat production and the resulting lack of profitability.
Taking this question a step further, I personally believe it is largely due to inadequate systems and controls, a belief I expressed to Mr. Townsend on one occasion and with which (at least at the time) he did not agree. I still believe it is the problem. The company does not know for sure, until WAY too late, exactly what is going on in all its various subsidiaries. This is nowhere more evident than the amount of time the company requires to produce
quarterly results for investors. Compare SMU's reporting dates with those of TFS. Granted, TFS has nowhere near the widespread operations of SMU. But SMU appears to me to really struggle to know for sure what is going on. And when problems pop up, they are largely unknown until it is too late to take appropriate corrective actions.
The underlying (and more substantive) risk to this is that if Townsend isn't the guy, SMU shareholders are stuck. DesJardines seems to me to clearly favor the guy. Moreover, he is clearly surrounded by a board that (again - IMO) appears to be dominated by "yes-men." No one on that board appears to me to be willing and/or able to stand up to either the Chairman or CEO. So the risk to SMU as an investment, at this point, is that the management team is
not up to the task and cannot deliver profitability on the known high level of interest in SMU's products.
Said another way, the success of the company's products is not, IMO, in question. It is the company's ability to deliver high and growing levels of profit that is in question. Bottom line: tons of potential. Substantial risks. FWIW, I and my clients still own some of the stock and some of the converts. (But quite a bit less than we did six months ago.) But it does keep me awake at night.
Finally, w/r/t the converts, the following is a copy of a couple of paragraphs that appeared in a report in our newsletter. I suggest modifying the prices given to reflect the present valuations, as well as modifying the remaining number of interest payments to reflect the time that has passed - and therefore the interest payments that have been made.
In the case of SMU's convertibles, each bond ($1,000 face amount) is convertible into 56.98 shares of SMU common. Thus, to calculate approximate "fair value" of the bond relative to the SMU common stock, the following formula can be used:
56.98 x (the current price of the common shares) + remaining cash flow differential (the difference between the interest payment on the notes versus the common dividend on an equivalent number of shares) for the period up to the earliest redemption date.
Thus, the current calculation would be:
56.98 x $17.875, or $1,018.52 plus $160 (four $40 semi-annual interest payments on the notes, less $0 in SMU common stock dividends, since it does not presently pay one), for a total value of approximately $1178.52, or 117.85 per bond.
Given this calculation, I would prefer to be a buyer of the notes, since they are presently quoted around 115. Of course, this formula may also be used in reverse, to discover what price of common the note-holders are assuming is fair. In this case, a bond price of 115 presumes a common worth about $17 . ($1,150 less the $160 income differential, divided by 56.98)
Hope this helps.
regards,
stephen barnes |
