SURGE COMPONENTS INC (SPRS) stock intrinsic value fair value estimate & owner earnings analysis

Surge Components is a small Long Island supplier of electronic components. It sells capacitors and discrete semiconductors such as rectifiers, transistors and diodes, plus audible signaling devices, to equipment makers, contract assemblers and distributors. Almost everything is made for the company in Asia (30% of purchases from Taiwan, 19% from Hong Kong, 47% from elsewhere in Asia), and one supplier is 28% of purchases. A Hong Kong subsidiary serves Asian customers. Export sales were about half of the $36.3 million of sales in fiscal 2025, and China alone was $10.6 million, or about 29%, with Canada $4.0 million and Europe $2.5 million. This is a distribution business with no long-term customer contracts: two customers were 18% and 14% of fiscal 2025 sales and similar shares the year before, and customers press for price cuts and rebates. Nothing in the filings gives a moat, backlog or contract we can point to, so we give no credit for growth. How we measure earnings. Owner earnings are operating cash flow, minus the cash swallowed or released by receivables, inventory and payables (which swing wildly for a distributor and would otherwise mask the real run rate), minus the cost of stock awards to employees, minus the part of capital spending needed just to stay in business (spending is tiny, $10,000 to $195,000 a year). Per diluted share they were: 2016 -$0.04, 2017 $0.04, 2018 $0.37, 2019 $0.33, 2020 $0.26, 2021 $0.50, 2022 $0.70, 2023 $0.16, 2024 $0.15 and 2025 $0.20. Two adjustments matter. First, the roughly $0.36 million a year of interest and dividend income on the company's cash is taken out of the business's earnings, because the cash itself is counted separately below. Second, 2018 included about $0.6 million of one-time insurance recovery and proxy-contest cost reimbursement, which is also removed. Fiscal 2021 net income included a $450,000 gain from forgiveness of a government loan, which was not cash and is not in these figures. What a normal year looks like. The business before investment income produced about $1.44 million in 2018, $1.80 million in 2019, $1.41 million in 2020, $2.86 million in 2021, $3.85 million in 2022, $0.82 million in 2023, $0.64 million in 2024 and $0.91 million in 2025. We use 2018 to 2025, because the 2017 tender offer retired about half the shares and reset the company, and because this span holds a full cycle: a steady pre-pandemic stretch, the 2021-2022 component shortage that carried sales to $51.9 million, and the destocking that followed. The middle of that range is about $1.4 million a year, or roughly $0.23 per share on about 6.0 million diluted shares. Fiscal 2025 ($0.91 million) is below that, but it carried $538,000 of unusually large option awards versus $15,000 in 2024; the first half of fiscal 2026 (ended May 2026) shows sales up 8.7% to $17.6 million and operating income of $301,000 versus $58,000 a year earlier, with the second quarter at a 4.9% operating margin. Two quarters is not enough for us to raise the level, but it supports leaving it at about $1.4 million rather than cutting it. Fiscal 2025 operating earnings grew about 42% from the 2024 trough; our base case assumes no growth in year one, and the step from $0.91 million to $1.4 million is a return to a typical year, not growth. Overhead (executive pay, equity awards, general expenses) has grown faster than sales since 2018, so margins at today's revenue are thinner than in 2018-2019; that is why we do not look for a recovery beyond the typical level. Balance sheet. At May 31, 2026 the company held $5.2 million of cash and $9.8 million of marketable securities, about $15.0 million, with no borrowings and an undrawn bank line. Office and warehouse leases, including a headquarters lease from a company owned by the two senior executives, run through operating costs and are not subtracted again. We hold back $1.5 million for operations and $0.18 million of unpaid preferred dividends accrued since 2001 (the small convertible preferred is already counted in the diluted share count), leaving about $13.4 million, or roughly $2.22 per share, that is surplus to what the business needs. That surplus is a large part of what the shares are worth in every case below. Bear case: $3.27 per share. Customers pull orders the way they did in 2022-2024, when sales fell from $51.9 million to $31.2 million (about 40%) and owner earnings fell from $3.9 million to $0.6 million. Applied to today's higher cost base ($9.2 million of operating expenses versus $8.0 million in 2024), a 20% sales drop at the 28.5% gross margin reached in 2024 leaves roughly break-even results. We use $0.5 million, $0.1 million and $0.1 million in years one to three, $0.4 million in year four, then $0.7 million a year (the 2024 trough level, about half of normal) through year ten, reflecting a permanent loss of share, tariff pressure on the China-linked 29% of sales, or loss of one of the two largest customers. After year ten we let earnings erode 8% a year. The business is worth about $6.3 million, it owes nothing, and the difference plus $13.4 million of surplus cash gives $19.6 million, or $3.27 per share. Even here the cash covers two-thirds of the value. Base case: $5.07 per share. Earnings stay flat at $1.4 million for ten years, since no growth is secured, and then erode 5% a year because there is no contract or moat protecting a commodity-style distributor; its 45-year record of surviving cycles is why we keep earnings alive that long rather than ending the story at year ten. The business is worth about $17.1 million, it owes nothing, and with $13.4 million of surplus cash the total is $30.4 million, or $5.07 per share. Bull case: $6.69 per share. Earnings run at $2.0 million a year for ten years, a level the company reached in 2019, 2021 and 2022 when gross margin and volume held, then erode 3% a year. The business is worth about $26.8 million, it owes nothing, and with surplus cash the total is $40.1 million, or $6.69 per share. We left out any case for new products, new markets or share gains, because nothing in the filings shows them under way. The margin-of-safety price. We are fairly sure of the cash, which is audited and mostly in securities, and much less sure of the earnings, which have ranged from $0.64 million to $3.85 million in eight years; a result half of, or a third above, the typical year would not be surprising. The worst plausible outcome is a customer downturn, the loss of one of the two largest customers and a tariff hit to China sales landing together while pay and equity awards keep rising. The business would survive that, because it has no debt and cash larger than a full year of overhead, but the operations would then be worth little and the shares would be worth little more than the roughly $2.22 of surplus cash per share, less whatever management spends on pay or poor acquisitions. If we are wrong about the typical level (say it is $0.7 million), the shares are worth about $3.27; if cash is spent unwisely, each $1 million lost is about $0.17 per share. The company pays no dividend, so over the holding period shareholders benefit only from cash accumulating at about $0.15 to $0.25 per share a year, and the price assumes a four-to-five-year holding period for that to be recognized. The margin-of-safety price is $2.50: that is essentially the net cash backing plus about 28 cents for an operating business that has earned between $0.15 and $0.70 per share every year since 2018, roughly two years of its weakest recent result for the whole operation, and from that price the bear case value implies a gain of about 30%. What could make this wrong. The surplus cash is only worth what management does with it; the executives own the headquarters landlord and are paid heavily relative to profit, and the diluted share count has risen from 5.8 million to 6.0 million. China-linked sales and Asian suppliers expose the company to tariffs. Previous valuations of this company were built on a different basis and are not directly comparable; what has changed in the business since then is the stronger first half of fiscal 2026 and a larger cash and securities balance.