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Lakeland Is An Interesting Business

April 13, 2012 | About:

I’ve spent most of the past week working on two in-depth analysis’s of microcap companies (to come when I get my orders filled!!!), as well as this month’s issue of the micro-cap magic formula newsletter (to come out tonight, and this month’s pick is excellent)… plus long days at work, of course!

However, I wanted to take a quick some time out to highlight this announcement by Lakeland (LAKE, mentioned several times on the site).

Management highlights the receipt of the largest order they’ve ever received from Brazil. Combined with another order, the Brazilian orders highlighted represent about $8.6m in revenue this year.

Now, it’s true Brazil is probably their highest margin market (see their last 10-k, page 29). But this a super low operating margin business- their YTD operating margin is 3.8%, and their best operating margin in the past 5 years comes in under 7%!!!!

So now think about that “huge” order. The company does more than $100m in revenue per year. So they’re adding just 8% of revenue, and (in total, using a 10% margin) just $800k in operating profit. With a total market cap over $50m, EV over $65m, and total assets over $100m…. well, this barely moves the needle.

Now, to be fair, a good bit of that $100m in revenue was from DuPont, which was lower margin and is going away. So you could say the stats I painted above are a bit bearish. But I challenge you to find a scenario where that $8.6m in revenue makes a meaningful impact on the bottom line.

And remember, this is an order driven business. If that $8.6m was going to lead to consistent orders, or a maintaince/service contract, or something like that, then I could see how this was big news. But there’s no indication that’s the case. This seems to be a one time revenue boost, and not even a very meaningful one.

So, now that we’ve gone through the “big” news in the release, let’s look at the negative news disclosed. $900k in additional charges for India plant shut downs and $230k for U.S. plant closures (I’m not concerned about the Brazilian foreign currency charge, that’s random noise and I honestly wish mgmt would ignore it as well).

That’s $1.1m in write offs. In other words, well in excess of even an aggressive forecast for what the Brazilian sales can deliver!

Now, again, the balance sheet is over $100m, so we’re talking about small amounts. And the charges are for closures that will hopefully lower the companies cost structure and improve margins.

But I really, really dislike management coming out and focusing on revenue growth numbers (their words “First and most important among our recent developments is the receipt of a signed purchase order “) when its effect pales in comparison to any cost cutting effort. Why not provide more detail on what really matters: how much money they can save by shutting down those plants, why they had to provide so much additional asset security to get a very small loan modified, and if they’ve engaged in any conversations with Ansell.

Finally, I think it’s instructive to note one more thing. This is pure speculation, but given the loan modification, the overall feel of the press release (trying to get the market to focus more on how good the upcoming year is going to be while glossing over charges and write-offs), and the fact that they are well behind their typical reporting schedule (last year they reported at the beginning of April, and they typically file before April 15th. The press release notes they’ll file towards the end of April)… I would bet LAKE is going to report some pretty crappy 4th quarter numbers. Again, pure speculation, but I get that feeling.

If anyone here thinks I’m missing anything, or that this Brazil order is a much bigger deal than I’m picturing it, please, let me know. I’m still long the shares, as they trade well under book value and a potential offer from Ansell makes for an interesting catalyst (even one speculative bad quarter doesn’t change that!!!). But I am growing less and less enthused with the stock as it continues to approach BV, and press releases like this only further dampen my enthusiasm.

Rating: 4.2/5 (10 votes)


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