Nu Horizons (NUHC) is a distributor of hi-tech electronic components. The stock dropped 25% in one day last week when a key supplier, Xilinx, cut Nu Horizons as a distributor in order to streamline Xilinx’s distribution network. Xilinx’s products accounted for over 30% of Nu Horizons’ sales over the last three quarters, so this will have a material impact on Nu Horizons’ operations and will hurt Nu Horizons’ revenue if the Xilinx’s products cannot be quickly replaced. However, the current market price of Nu Horizons is such that this seemingly negative announcement may actually be good news for the stock!
Before writing off the preceding statement as preposterous, consider the following: Nu Horizons trades for just over $60 million, while its net current asset value is over $100 million. Most of its current assets (approximately $225 million worth) are in the form of inventory and receivables, and so this negative announcement may actually be a catalyst for cash generation.
The company’s Xilinx inventory is more than $40 million, so as the company either works through it or returns it (with expenses paid for by Xilinx), cash will be generated. If Nu Horizons’ sales are reduced because it cannot replace Xilinx’s products, further cash will be generated thanks to a reduction in the accounts receivable. Of course, if replacement products cannot be found, the severed relationship between Nu Horizons and Xilinx will reduce Nu Horizons’ earnings. But when one is buying assets for a fraction of their worth, it’s never a bad thing when those assets are converted to cash.
On the other hand, if the company can replace the Xilinx products quickly and easily, there will be little in the way of cash generation, but revenues and future earnings may also not change materially. In this case, the company will be able to continue to try and grow its profitability, and shareholders buying at this price are still minimizing downside risks, thanks to the discount the company trades at relative to its liquid assets.
Nu Horizons has not exactly been generating excellent returns for shareholders over the last few years; a shrinking of the business (and the cash that is generated along with that) is not necessarily a negative! As solely a distribution business, Nu Horizons should be able to adjust its cost structure to a level commensurate with lower revenues, if need be.
Disclosure: Author has a long position in shares of NUHC