NCAV is decreasing and now at $4.81 per share.  

DCF valuation: 2m FCF, 0% growth = $15.43

EPV: 2.5 adjusted income = $13.01

An ugly business IMO, but looks cheap.

I haven't read through all of the SEC filings, but it looks like the litigation has been mutually dismissed.  With that concern out of the way, could be a good entry point?

    Your valuation of $5.83-$8.33 is so much lower of the EPV, DCF and Graham. Moreover you said "the current valuations of DCF, Graham and EPV all point towards a $12 value." But I used your spreadsheet to get numbers like 22-34 per share. There must be something wrong with my valuation. I know DCF just uses the most recent year's FCF, which makes it $34. But I am not sure how much I should enter into the spreadsheet for FCF. Could you please tell me how you come up with $12?

Thanks,

Zehua

The price of UUU is up 0.96 as of today to 6.56 (+17%) from my first post.

I believe this is due to the following factors:

-Increased institutional ownership of the company in February (First Manhattan Co). 2/16

-Quarterly results report that assets are up, liabilities are down. 2/16

-UUU has settled some ongoing litigation that I mentioned previously as  a possible ongoing concern. See 2/26 8-K. 

-CEO's employment agreement extended and bonus threshold lowered. See 3/12 8-K.

Although they do have plenty of cash, my version of NNWC shows it to be worth $2.71 and NCAV of $4.68. So it is trading about 20% above NCAV. I would say there is some downside but that depends on what the upside is.

I cant say for sure what the reason is for the drop from the high $30's to $5 but I notice that their COGS % is close to an all time high. It is currently at 77% and has steadly gone up since 2004. Either their 50% ownership of the Hong Kong manufacturer isn't helping or parts prices are going up rapidly. This ultimately is affecting their margins.

And in 2009, their net income from continuing operations was $1.4m. Let's say the net income stabilized to around $2.5m but depending on the loss of their contract with one of their major retailers, their net income could turn out to be around $2m or even less.

So assuming it is $2m, divide this by 2.4m shares outstanding to get an eps of $0.83.

PE of 7 = $5.83

PE of 10 = $8.33

So while UUU isn't expensive, I don't believe it is overly cheap.

Ignoring the loss of retailer contract, the current valuations of DCF, Graham and EPV all point towards a $12 value.

If it really is just business as usual, than it would be considered cheap, however, there is obviously more work that needs to be done.

What other qualitative analysis can you share?

First, given that this is my first post, I want to thank those who have contributed ideas to this forum and to Jae specifically for creating this excellent source of value investing information. I know I have personally benefited greatly from the knowledge found here and now would like to begin to hopefully return the favor with my first value stock idea.

Company: UUU – Universal Security Instruments, Inc.

Short Description: Design and market smoke detectors.

Description (courtesy of Reuters): Universal Security Instruments, Inc., incorporated in 1969, designs and markets a variety of safety products consisting primarily of smoke alarms, carbon monoxide alarms and related products. Most of the Company’s products require minimal installation and are designed for installation by the consumer without professional assistance, and are sold through retail stores. It also markets products to the electrical distribution trade through its wholly owned subsidiary, USI Electric, Inc. (USI Electric). The electrical distribution trade includes electrical and lighting distributors, as well as manufactured housing companies. Products sold by USI Electric require professional installation. As of March 31, 2009, the Company owned a 50% interest in the Hong Kong Joint Venture. Universal Security Instruments, Inc. imports all of its products from various foreign suppliers. During the fiscal year ended March 31, 2009 (fiscal 2009), approximately 97.3% of its purchases were imported from the Hong Kong Joint Venture.

Pros:

1. Easy to understand business – They design and market smoke, fire, and carbon monoxide detectors to sell in retail stores.
2. They have a large amount of cash and short term investments as well as other current assets.
3. UUU is designing a new line of products to be released in the March/April 2010 time frame.
4. Earnings have been consistent and largely positive although there has been a slightly downward trend the last few years. However, the drop to the current price of 5.60 seems to be an unreasonable drop from a high of 35 a share in April of 2007 when the business is largely the same. 
5. The company has 50% ownership of the Hong Kong manufacturer that provides over 97% of the devices they sell.
6. Company has only 18 employees and seems capable to weather the market downturn while maintaining profitability. 
7. 27% institutional ownership shows confidence in the company.

Cons:

1. They are losing a contract from a retailer who carries their products in the first quarter of FY 2010 according to a 12/22/09 press release. The retailer will however continue to carry the product online and through the retailer's professional contractors desk. Management thinks that new products released in this time frame will make up for this loss as well as interest from other retailers to carry their products. However, this is a big if and unfortunately I do not know how much of their business and revenue will be affected by this loss.
2. Low margin business and steady earnings to slightly negative earnings growth recently.
3. Not a <66% NCAV stock
4. There is ongoing patent litigation that may eventually result in a settlement.

Conclusion: At the current price of 5.60 a share, the company shows limited downside given the strong balance sheet and consistent positive earnings. With a new product line announced, there is a strong potential for revenue to return to previous levels. The company is in a much stronger position now in terms of their balance sheet IMHO than they were in march of 2006 when the price was roughly 16 a share. Therefore, UUU is a stock to consider if you are willing to look beyond some immediate uncertainty and pending litigation to find a company with a strong earnings history, low p/e and strong balance sheet at an attractive valuation.

Disclosure: I have no position in UUU at the time of this writing.

Fundamental Analysis

Current Price at close on 1/15/10: 5.60

Market Cap: 13.37 Million

P/E = approximately 7.2

Balance Sheet Data from 9/30/09 (from Google Finance)

• 5.98 Million in Cash and Short Term Investments
• 5.34 Million in Total Net Receivables (Discounted by 25%) = 4.005 Million
• 6 Million in Total Inventory (Discounted by 50%) = 3 Million 
• Prepaid Expenses = 0.37 Million
• Liabilities = 6.52 Million
• NCAV = 5.98 Mil + 4.005 Mil + 3 Mil – 6.52 Mil = 6.465 Million