Arne Alsin: No pretty bow, but still a gift

Here is a new stock idea: recently I said “bargains don’t arrive at the market in pretty packages wrapped with a bow”. While my gift to you, Tecumseh Products, is an amazing bargain, it is far from being wrapped in a pretty package. It is not only a messy package, it is also complicated – there are a lot of moving parts. Here is the story, in brief.

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A few months ago, Tecumseh had compressor, engine and electrical businesses. It was struggling with a potential liquidity crisis because of a significant debt burden. The company has just finished selling off its engine and electrical businesses for $260m, using the proceeds to pay off all of its domestic debt. Now the company can concentrate on maximising the potential of its global $1.1bn (annual sales) compressor business.

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Today, the market values Tecumseh at about $400m. By my calculations, the company will not only be debt-free, but also will accumulate $150m-$200m in cash over the next few quarters from non-operating items such miscellaneous asset sales, a tax refund, monies from an over-funded pension and assorted other items. My calculations also indicate that if the dollar is stable, the company can generate $90m in annual free cash flow beginning in 2009.

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Based on these numbers alone, you can recognise a bargain. This gift does not need to be wrapped in a pretty package tied with a bow.