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SPCO: an unfortunate turn of events

September 05, 2012 | About:
whopper investments

whopper investments

49 followers
A few months ago, I mentioned Stephan Co (SPCO) and its rather morbid catalyst.

Well, the company recently put out a press release, and (unfortunately) it looks like the company is going to focus on growing, not selling itself.

Even more unfortunately, the company is cutting their dividend and ceasing share buybacks.

But don’t take my word for it. Check out the release the company sent to all its shareholders below.

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Now, I don’t think this press release makes much sense for a couple of reasons.

First, the company’s business continues to deteriorate. Here’s the most recent income statement.

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Given the company’s business has been declining for years, I don’t see how installing a new CEO from outside the firm and giving him free reign to invest makes more sense than selling to a competitor who could realize synergies and would know what they’re doing.

Second, I don’t see how cutting the dividend and ceasing share buybacks make sense. Here’s their most recent balance sheet.

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Now, the company owes their deceased ex-CEO’s family ~$1m, which isn’t on there. But even if you factor that in, the company has more than $1 per share in excess cash and, at today’s share price of ~$2.20, is trading for<80% of NCAV. While I don’t understand why investing into the business instead of selling the company makes sense, I really don’t understand why they need to cut the dividend and cease share buybacks. There’s almost no way the new CEO could invest all of this excess cash into the business (short of a huge acquisition), and even if they could, I don’t understand how making an investment in the business makes more sense than buying back shares at these prices.

So, there you have my little rant. I don’t understand the new strategy at all, and I wish the company would just sell themselves.

That said, it’s hard for me to imagine they aren’t still in play: I doubt the deceased CEO’s family wants to hold such a big chunk of shares now that they’re not associated with it, and there is still an activist on the board who has pressed them for a sale before.

And shares still seem too cheap to ignore at these prices. Even after adjusting for the $1m payment, book value is almost $6 per share and NCAV is close to $2.75, both well in excess of today’s $2.20 share price. If the new CEO can get the company anywhere close to their profitability level from three or four years ago, the stock could easily push $6+ per share. If not, the NCAV and strong balance sheet should provide very strong downside protection.

Disclosure- Long SPCO

P.S.

I was doing some follow up work on my earlier post on SPCO, and I noticed something I hadn’t before. Michael Smith, the new CEO, has a long relationship with Richard Barone, the activist / board member who pushed for a sale a few years ago. They served together on the board of MACE for almost ten years, and Smith was brought in as temporary CEO of Mace in late 2011, where Barone is now Chairman. Given their experience together and Barone’s clear motive to sell the company, perhaps the announcement was not quite as negative as my first post warranted…. though I still think it’s silly to stop buying back shares at these prices!!!!

Rating: 2.7/5 (6 votes)

Comments

Fear=Fortune
Fear=Fortune - 1 year ago
I have been holding SPCO shares for 4 years. I view them as a bond with a lottery ticket attached. Unfortunate to see Frank's sudden death. This does, however, remove the golden parachute that made it difficult to sell this company. I know the letter states a plan of growth, but if that fails the door is finally open for a plan of sale.

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