The company remains astonishingly cheap on an asset basis — net current assets of $8.64 per share and book value per share of approximately$14 per share by my calculations versus a current share price of approximately$7. They’re profitable, have a solid history of profitability, and management is very, very solid.
Speaking of management, that’s what I wanted to focus on in this article. I really like some of the things I see from them. I mentioned in my first article that in reading through the 10-K and conference calls, you could tell they really got this business. After reviewing the third-quarter conference call, I still feel the exact same way.
At one point during the conference call, management was pressed with a question of why they had used a share repurchase instead of establishing a dividend, followed by a question of why they didn’t pay a dividend. Management responded that they feel a repurchase was/is a better use of funds at today’s prices, and that they wouldn’t be pressured to take money out of the business through dividends when they think they can earn attractive long-term returns. Great stuff.
A second caller then pressed them on this point, asking about why they should keep money in the business when returns on capital are so low. The caller then pressed and asked management if they felt they could get ROE up to 12% within a five-year period. Management responded with some very intriguing points. They were, and I am paraphrasing from memory here, so please review the conference call for yourself to ensure the accuracy of all statements:
1) We believe we can get to 12% returns on equity within two years. The caller pressed here and said that would call for a big increase in earnings. Management said they understood that but stood by their two-year, 12% ROE prediction.
2) Considering we believe we can earn 12% ROE, and a company earning 12% ROE is worth at least book, shareholders at today’s prices should see a 24% compound annual return on their investment (again, this is a paraphrase of what management said. This is not a direct quote. But what they said was very similar to this.)
Now, you always have to take what managements say with a grain of salt. They’re almost always perma-bulls on their company and its prospects. But given LAKE’s solid history of profitability (no operating losses in the past 10 years) and how cheap they are trading relative to their assets, having that much upside versus a very, very asset protected downside is very, very attractive.
Frankly, I’d prefer if they would get more aggressive on share repurchases, even slowing down inventory growth or liquidating inventory to do so, but aside from that I don’t have to much to argue about.
Disclosure: long LAKE