Profiting from Patience

NEW YORK (TheStreet) -- Deep-value situations sometimes take a great deal of time and patience to play out. In this fast-paced, up-to-the-minute information-driven market, many investors don't have that level of patience, especially when it comes to companies with little or no analyst or financial media coverage. That's often where there are great opportunities, but it is difficult to get relevant information.

Tecumseh ( TECUA, TECUB), a poster child for patience, is a company you've probably never heard of. If you have, it's probably due to the company's small engine business, which it sold back in 2007.

Today, the company is primarily a manufacturer of hermetically sealed compressors used in air conditioners and freezers for both residential and commercial applications. This is a business that suffered during the last recession as demand fell. Revenue has been on a downward path for several years, in part due to the sale of businesses, but also due to poor economic conditions.

Shares fell to about $3 in May 2012, following yet another quarterly loss, but have been on a tear ever since; they are trading at a two year-plus high of $10.55. Last month, the company, which generally been tight-lipped at least as long as I've been a shareholder, held an investor update call, which was a long time coming. TECUA Chart TECUA data by YCharts

The call outlined cost-cutting initiatives and other potential improvements, including monetizing some of the company's assets. It was a brilliant move by a company that has had its share of internal struggles over the years. It allowed investors, for once, to get a glimpse into how the company plans to return to profitability.

The company's balance sheet and supporting asset base attracted me to it in the first place. At the end of 2012, Tecumseh owned 12 properties around the world, for a total of 3.6 million square feet of manufacturing and other building space.

Tecumseh's tangible book value is $13.49, and so the shares are trading at just 0.78 times tangible book. The company ended the first quarter with debt of $60 million, and $42 million, or $2.27 per share, in cash.

Of course, a decent balance sheet will carry you only so far, and Tecumseh needs to start generating a positive bottom line, which it has done just once in the past eight quarters, and that particular quarterly profit was due to one-time non-operating gains.

Cost-cutting should help, as should a recovering global economy. In 2012, Tecumseh generated just 22 percent of revenue from North America. The bulk of company revenue, 54%, was from South America (30%), and Europe (24%).

Since the company's products are commodity based, the price of copper and steel will affect the bottom line. To that end, Tecumseh is now using much cheaper aluminum in place of copper where appropriate.

In this case, patience is paying off, and we'll see if Tecumseh can deliver on the bottom line.

At the time of publication, the author was long on Tecumseh.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, Heller was long XXXX.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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