Span-America Holding (SPAN) has been part of the ValueUncovered portfolio for over a year, my longest holding.

Despite lots of volatility throughout the year (touching almost $20/shr), the stock’s is only slightly up, primarily helped by consistent dividend payouts (including a large special dividend earlier this year).

I am catching up on past SEC filings, and SPAN’s 2010 report came out a few weeks ago.

Financial Review

Total revenues in 2010 declined 6% to $52.4m compared to the prior fiscal year, with declines reported in both operating segments.

SPAN’s therapeutic support surfaces (the largest part of the medical product segment at 62% of sales), are considered a capital expenditure. Although the outlook has improved, the product line continues to face weakness in the company’s main markets.

The acute care market continues to be the bright spot, with several new product lines experiencing double digit YoY growth. Overall, medical sales were down 6% to $35.6m compared to $37.8m in 2009.

In the custom products segment, sales decreased 7% to $16.8m compared to $18.1m last year.

Last year’s numbers were helped by a one-time test program which was not repeated in 2010.

This is the 3rd year in a row of annual revenue decreases.

More worrisome, the company has slowly shifted its product mix towards consumer products and away from therapeutic support surfaces, which command much higher margins – support surfaces are down from 54% of total sales in 2007 to 43% in this latest fiscal year.

Despite the lower top-line, the company remains solidly profitable and continues to throw off generous amounts of free cash flow.

Net income was $4.5m – down slightly from the year before – but the company still managed to produce $5.3m in FCF. Using these figures and the current market cap of 41m equals a solid FCF yield of 13%.

The company paid out $3.9m in dividends, or 86% of net income, a solid way to return cash to shareholders.

The balance sheet remains strong, with a current ratio of 3.39, no debt, and cash and marketable securities of $4.4m

Industry Outlook

While the company continues to be solidly profitable, it is facing headwinds on a number of different fronts:

Increased Foreign Competition – There is no doubt that the company will face increased pressure from foreign competitors in the future, especially China.

This shift will put even greater pressure on margins, and slowly erode the high returns on capital that the company has experienced. Some product segments, such as consumer bedding, have little differentiation aside from price:

“During the last two years, we have experienced increased competition in our medical and custom products segments from low-cost foreign imports. In the medical segment, the number of low-cost, imported mattress products has increased in the last two years, but it has not yet had a significant impact on our medical business. We believe that we have potentially greater exposure to low-cost imports in our consumer bedding product lines because those products have more commodity-like characteristics than our medical products.”

Uncertainty around Medicare – As a medical company, a number of SPAN’s products are eligible for reimbursement from Medicare. There has been a ton of proposed regulation and controversy over the recent healthcare laws.

While the fallout is still undetermined, it will create additional fear and hesitation on the part of consumers when purchasing new medical products, potentially cutting into SPAN’s sales.

Continued Economic Weakness – While the stock market has enjoyed a record run, the economy and job market are definitely not back to full speed. SPAN has benefited tremendously over the past five years by an increase in its therapeutic support surfaces – in 2010, they made up 42% of total sales.

The sale of these products significantly boosted SPAN’s FCF rate, up to the current levels of $5-$6m per year. It is unclear whether the company can continue aggressive growth in this area.

Conclusion

I recently came across another post regarding the author’s equity investing philosophy. In addition to laying out a solid set of ground rules, it also included this quote from Warren Buffett’s 1977 annual letter:

“One of the lessons your management has learned – and, unfortunately, sometimes re-learned – is the importance of being in businesses where tailwinds prevail rather than headwinds.”

I think that this valuable lesson applies to SPAN.

While the balance sheet remains strong and the company continues to throw off lots of cash, the overall trend is headed in the wrong direction.

While there still appears to be a gap between the stock’s intrinsic value and the current market price, I’m afraid that the value may fall to meet the price instead of the other way around.

The stock is releasing earnings in the next few weeks. As a general rule, I try to avoid holding stocks through an earnings release unless I plan to hold for long-term.

In addition, I’ve been growingly increasingly nervous of the broader market and therefore actively trimming my positions in order to raise more cash.

With that in mind, I’m closing out my position in SPAN at today’s closing price of $15.55, a gain of 10.06% vs 16.74% for the S&P.

Disclosure

No positions.

A few days ago, SeekingAlpha announced a premium program that would allow its contributors to get paid for writing exclusive articles for the site.

The payout is $10 per 1000 pageviews. According to SA, top posts can generate upwards of 20k visits, or a nice $200 payday under the current payout rules. I applaud the management team for taking a bold step and paying well-above the reported market rate for similar programs.

Despite the attractive lure of cash, the response has been mixed.

Many contributors have viewed the premium program as an opportunity to earn something for the valuable content they have created. However, in order to get this something, the author must give up exclusive rights to the article in question.

On one side of the argument, Felix Salmon writes that Seeking Alpha’s new program could actually be an unwelcome development:

“Seeking Alpha here isn’t really paying per pageview at all. (If it were, it would pay contributors of all articles, not just exclusive articles.) What’s really happening is that Seeking Alpha is buying premium content, at zero up-front cost, which it can then resell in any way it likes and for as much money as it likes, with none of those revenues being shared with the author.”

In a follow-up article, Salmon continues (note: emphasis is mine):

“Investors, in particular, tend to value the discipline involved in thinking through their thoughts clearly, and then writing them down and having a permanent record of exactly what they thought when. It’s a great way to stop deluding yourself about why you did what you did — and it’s much less valuable if you’re subconsciously trying to write a post which lots of Seeking Alpha readers will click on and comment on.”

I’m a self-taught investor.

One of the main reasons I started this blog was to get in the habit of writing down my investment thesis. Receiving feedback, via comments or email, is one of the most rewarding parts of this experience.

I believe that this discussion has significantly improved my investment skills.I would hate to lose the valuable debate with my readers or potentially get lost amidst the thousands of other contributors at Seeking Alpha.

Despite the potential drawbacks, there could be long-term advantages as Whopper Investments points out:

“I am pleasantly surprised by the new policy, and I think it will bring a lot of value investors out of the wood work and encourage them to write new articles. Its not hard to imagine articles on seeking alpha drastically increasing, and strong writers will likely pick up some nice pocket change. However, there will definitely be some negative side effects. It will be interesting to see how it all plays out.”

Personally, I have been contributing to SeekingAlpha since July 2010 and currently have 33 articles published.

While I have a few posts that have climbed over several thousand page views, (the FIS tender offer and a writeup on APT being a few examples) the majority of my view counts come in much lower.

At the same time, Seeking Alpha has undoubtedly helped me increase my exposure and profile in the investment community. I plan to continue contributing articles when appropriate, but doubt I will join the premium program.

As you might imagine from one of the most popular investing sites,  much of the content on Seeking Alpha is oriented towards the opposite end of the spectrum compared to my personal investment philosphy, and therefore in turn, the posts here at Value Uncovered.

I enjoy writing long and detailed posts about undervalued microcaps. I spend hours digging through historical SEC filings, reviewing industry statistics, and performing valuations. This diligence results in lengthy, but hopefully detailed and valuable content.

My posts aren’t the core bread-and-butter of Seeking Alpha – but hopefully they continue to be a worthwhile read for my core audience.

Disclosure

Long APT.

As usual, here are a some value investing links from the past few weeks:

DHT Holdings, Inc. (DHT)

Long Thesis. Shipping is an industry I usually avoid, but Whopper Investments makes a good case for DHT Holdings (DHT), a company that operates double-hull tankers in the highly-competitive crude oil shipping market.

The company has a new management team in place after struggling through the economic downturn (basically, by using most of their FCF to continue paying out dividends despite declining business fundamentals).

Based on a recent appraisal, DHT holds ships valued at approx $415m compared to an enterprise value of $440m, meaning investors are picking up the rest of the business and its guaranteed cash flow (due to long-term contracts) for only $25m.

RadioShack (RSH)

Long Thesis. RadioShack managed to survive the economic downturn reasonably well, and now sits on over $700m in cash, or approx. 1/3 of its market cap.

Management has been using this cash pile to buy back shares, repurchasing almost $300m in stock in the past quarter alone.

The company trades at a P/E level of 9 despite stable operating margins and high ROE (averaging almost 20% over the past several years).

Gaming Partners (GPIC)

A stock recently featured on ValueUncovered, Petty Cash provides additional insight into Gaming Partners International (GPIC).

The linked chart tracks GPIC’s improving business fundamentals (CROIC and operating margins) despite significant ups and downs due to the cyclical nature of the business.

The company benefits from a dominant position in its core market (casino chips) with decent tailwinds in the casino sector, which suffered through a sharp correction in 2008/2009.

Diamond Offshore (DO)

Long Thesis. While concerns over drilling in the Gulf of Mexico continue (with new permits unlikely until late 2011 or 2012), the official ban lifted in October 2010, and most drillers have rallied significantly in the past 6 months with one exception: Diamond Offshore (DO).

In 2009, 32% of Diamond’s revenues were from the Gulf of Mexico; that number is down to 21% through the first nine months of 2010. Only 5 rigs remain in the region, with 3 others repurposed to other parts of the world.

The company has generated annualized free cash flow of approx $850m in 2010, with shares priced at only 10 times these depressed free cash flow levels.

DO continues to return cash to shareholders via special quarterly dividends and management remains bullish on the long-term prospects for deepwater operations.

Primus Telecommunications Group (PMUG.OB)

Long Thesis. PMUG recently emerged from Chapter 11 bankruptcy protection (a good signal for additional diligence by value investors) with a repaired balance sheet but depressed valuation due to lack of liquidity and institutional coverage.

The stock is extremely cheap looking at the common valuation metrics: P/FCF – 3.3x, EV/EBITDA – 3.8x, EV/Revenue – 0.38x. PMUG throws off a tremendous amount of cash, with a FCF yield of 31%.

The company also hired a new CEO with tremendous background in the space, who is highly incentivized (via options and restricted shares) to increase the stock price.

Several upcoming catalysts include a relisting on a major exchange (probable in Q1 2011), refinacing of the existing debt load (saving tens of millions of dollars in interest expense), or the possible sale to private equity group or strategic buyer.

Comparable buyout transactions typically occur around 1x LTM revenue or 5x EV/EBITDA, significantly above PMUG’s current price levels.

Suggestions

If you have links or suggestions to detailed analysis from other value investors, please drop me a line using the Contact Form.

I’m always open to ideas from other investors, especially for a thoughtful and well-researched investment articles.

Disclosure

Long GPIC.