Show And Tellabs

It's unusual to see a large company where a net cash position makes up the bulk of its market cap, but such is the case with Tellabs (TLAB), seller of switches and other networking equipment to telecom providers. Tellabs trades for just $1.2 billion, despite a net cash position of more than $900 million.

As such, the company's enterprise value is some $250 million, which represents just 20% of sales! Unlike many other large caps we've seen with ridiculously large cash balances, only a fraction of Tellabs' cash is stuck overseas and subject to repatriation taxes if returned.

You might expect this company to be burning through cash, based on the valuation Mr. Market is according it. But it's not! The company is currently cash flow positive, as it has cut staff and reduced capex in response to a tough revenue environment.

You would be in good company as a value investor interested in this stock. Third Avenue, run by Marty Whitman, owns a decent chunk of this company. Furthermore, one of Tellabs' founders still chairs the company, and owns about $100 million worth of shares. As such, one may be inclined to believe that he-who-is-in-charge has interests aligned with those of shareholders.

A few warnings should be heeded, however. Historically, the company's earnings are volatile, taking big swings from negative to positive and back. The company operates in a constantly changing high-tech environment, and it has to compete against companies that likely have competitive advantages.

Furthermore, cash has been wasted in M&A activity in the past, and there's no reason to think this couldn't happen again. For whatever reason, the company is not buying back shares at the moment despite the low price. Though management was pressed on the conference call to return cash to shareholders, it reminded shareholders that buybacks are not the only way to create value. Though at this price and with this company's track record, it probably is!

Tellabs offers value investors the safety of cash, and the confidence of investing alongside a successful value investor. At the same time, however, the risk of poor operating performance and lousy capital allocation preferences loom.

Disclosure: No position