On Dec. 17, Mario Gabelli, the Chairman and Chief Executive Officer of GAMCO Investors Inc. added Lawson Products Inc. (LAWS, Financial) at an average price of $12.65 and currently holds 217,348 shares of the stock. It was the fourth time he added the stock, which makes me feel that he is betting that manufacturing output and non-farm payrolls will expand in the near future. It is good to remember that the industry performance is correlated to production growth, non-farm payrolls and employment levels.
Precarious Financial Position
This company operates as a seller and distributor of systems, services and products to the industrial, commercial and institutional maintenance, repair and replacement marketplace. Lawson faces strong competition because of low switching costs and weak product differentiation.
There's no doubt that Lawson is in a precarious financial position. For this reason, some efforts were made in the recent past, like entering into an agreement to sub-lease a portion of its leased headquarters where it expects to receive cash proceeds of approximately $2.9 million or the new agreement to modify certain terms of the Loan and Security Agreement dated as of August 8, 2012.
Severe Warning Signs
We have to mention two severe warning signs issued by GuruFocus: revenue has been in decline for the last 5 years and over the past 3 years; the firm issued USD 13.165 million of debt.
Valuation
In terms of valuation, its price-to-book ratio of 1.6 indicates a premium versus the industry average of 1.29 while the price-to-sales ratio of 0.37 is below the industry average of 0.55.
Earnings per share (EPS) decreased dramatically in the most recent quarter compared to the same quarter a year ago and it has demonstrated a negative trend in the last 10 years. We include in the next graph the stock price because EPS often lead the stock price movement.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to its ROE from the same quarter one year prior. This is a signal of weakness and is negative for investors.
Competitors such as Barnes Group, Inc. (B, Financial), Fastenal Company (FAST, Financial) and MSC Industrial Direct Co. (MSM, Financial) will be better options in term of ROE.
| Ticker | Company Name | ROE (%) |
| LAWS | Lawson Products, Inc. | -88,4 |
| B | Barnes Group, Inc. | 11,9 |
| FAST | Fastenal Company | 27 |
| MSM | MSC Industrial Direct Co., Inc | 17,1 |
Final Comment
The weaknesses we have already seen in the article, such as declining earnings per share, deteriorating debt levels and extremely disappointing ROE makes me think that they should have a greater impact than any possible strength. As a matter of fact, this time I will not follow Gabelli, because I think the stock is a sell because also it has missed analyst estimates almost every time in the last quarters. Other Hedge fund gurus that reduce position were Arnold Van Den Berg and Jim Simons.
Â
Disclosure: Victor Selva holds no position in any stocks mentioned.
Â
Â
