Brooks Automation Seen as Undervalued

Brooks Automation (NDAQ: BRKS) shares have recovered from their lows, but many value investors insist that the stock remains undervalued. David Nierenberg of D3 Family Funds is one of these investors that first made a case for the stock at this year’s New York Value Investing Congress. Despite the compelling arguments, Brooks’ stock continued to slide to their current levels.

Brooks Automation is now trading for roughly its net asset value, which makes it an attractive stock in the eyes of Jonathan Heller of Value Investing Congress. The CPA noted in the organization’s blog that buying the stock at its current price of $5.10 is like buying $2.25 in cash, $1.17 in other assets, and getting an additional $5.11 in long-term assets, $1.82of which are PP&E and LT marketable securities.

Despite the deep value, many investors are concerned about Brooks Automation’s recent earnings. The company reported progressively worse earnings throughout 2008 and is expected to report growing losses into the third quarter of 2009 before things begin turning around. This cash burn could end up reducing the amount of cash on the books and deteriorating the value of the stock.

The bright side of the situation is that Brooks Automation has accrued more than $114 million in net operating loss carry-forwards to offset taxes on future income. Moreover, the company has no debt on its books and a strong capital position, which means it would likely have no problems if it were to obtain debt to pay its bills and use the cash to unlock value through a buyback or other action.

So, how can investors take advantage of this steep discount while committing less capital upfront? One way may be to use long-term options. While there are no LEAPS available on the stock, investors can purchase options with an expiration date set in April of 2009. Currently, the $2.50 April 2009 call options are trading for $2.60 per contract. This means investors can purchase the right to 100 shares at $2.50 anytime over the next 115 days for just $260 versus $510 purchasing the underlying stock.

See “Using LEAPS as a Stock Substitute” for more information or check out our e-book “Trend Trading on Steroids” for a more comprehensive strategy.

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