Follow-up (2) Technical Communications Corporation (NASDAQ:TCCO)

As you might remember, I sold my TCCO position a few weeks back after some sloppy research (link to that post). The day after I managed to correct my misstake when the share price of the company for some reason plummeted back to former levels. See link to post for that re-purchase: checklist-analysis.

Yesterday a fellow net-net investor alerted me on Twitter saying that something again was going on with TCCO with the shares skyrocketing +25%. This time I conducted a proper research investigation but found no news or indications validating the big share price increase. I therefore concluded that TCCO again was exposed to a pump and dump scheme by traders and that the safety vale for a follow-up was valid. The follow-up resulted in a sale of my position at a price of 2,95 USD since the company was then trading at P/NCAV>1. In relation to my purchase price of 2,40 USD that translated into a return of 22,6 % (net of currency effect and brokerage fees).

Today the shares of TCCO, as many times before, plummeted back to former levels and I managed to re-purchase my position at a price of 2,35 USD. Since no new Q-report has been published since my last checklist-analysis I will refer to this post for validating my re-purchase: checklist-analysis Q3 2016 TCCO.

Disclosure: The author is long NASDAQ:TCCO when this analysis is published.

 

Technical Communications Corporation (NASDAQ:TCCO)

Q3 2016 – 2,40 USD

1kr50öreTechnical Communications Corporation (TCCO) is engaged in the design, development, manufacture, distribution, marketing and sale of communications security devices, systems and services. The Company’s products consist of electronic devices that enable users to transmit information in an encrypted format and permit recipients to reconstitute the information in a deciphered format if the recipient possesses the right decryption key. The Company’s products consist primarily of voice, data and facsimile encryptors. Its products can be used to protect confidentiality in communications between radios, telephones, mobile phones, facsimile machines and data network equipment over wires, fiber optic cables, radio waves, and microwave and satellite links. The principal markets for the Company’s products are foreign and domestic governmental agencies, law enforcement and military agencies, financial institutions, and multinational companies requiring protection of mission-critical information. – Google Finance

1. Adequate margin of safety (criterion a) or b) must be met): 

a)

  • P/NCAV < 1x
    • 0,85x 

&

  • EV/Operating earnings(5y&10y) < 3x
    • 5y =  0,5x 
    • 10y = 0,4x 

b)

  • P/NCAV < 0,76x
    • 0,85x X
  • NCAV-burn rate  > -25 % for Qx – Qx-4 and Qx – Qx-1
    • Qx – Qx-4 = -27 % X
    • Qx – Qx-1 = -11 % 

2. The risk of permanent loss is low:

2.1 The risk of bankruptcy is low (criterion a) or b) must be met):

a)

  • Debt/Equity < 25 %
    • 0 % 

b)

  • Z-score ≥ 3
    • 5,8

&

  • Debt/Equity < 50 %
    • 0 % 

2.2 The company’s business model is not totally unprofitable (criterion a) or b) must be met):

a)

  • Positive retained earnings:
    • 1,467 ($000)

b)

  • Positive aggregate operating income for the last ten years:
    •  32,600 ($000) 

3. The risk of share dilution is low (criterion a) or b) must be met):

a)

  • Share dilution < 2 % for Qx – Qx-4 and Qx – Qx-1
    • Qx – Qx-4 = 0 % 
    • Qx – Qx-1 = 0 % 

b)

  • The company has net repurchased shares during the last ten years:
    • TCCO has net issued shares during the last ten years. Last issuance of new shares was in 2012. X

4. The risk of fraud is low (overall assessment on the basis of the answers below):

  • Today’s management has not historically been linked to fraud:
    • I have not found any historical indications of fraud from TCCO’s current management.  
  • The company is not mainly Chinese (business and/or majority shareholder):
    •  American company and shareholders. 
  • Company data exist for the last ten years:
    • Yes. 
  • The company has repeatedly allocated capital to shareholders (dividends and/or share buybacks):
    • TCCO paid a dividend during year 2013-2010 (range 0,40-0,10 USD per share). 
  • The CEO and/or insiders have ownership incentives (worth of shareholding / salary + bonus > 3x):
    • CEO = 3x 
    • Insiders as a group = 2x X

Other notes:

  • 8-K report
    • TCCO received an order valued 2,4 MUSD this October.
  • The CEO (Carl H. Guild, Jr.) owns 18 % of the shares outstanding.
    • Insiders together own 25 % of the shares outstanding.
  • TCCO is a nano-cap stock: 4,2 MUSD in market capitalization. The trading is very illiquid.
  • My old posts of the company:

MoS

Disclosure: The author is long NASDAQ:TCCO when this analysis is published.