A while ago, I had a successful investment in Lakeland (LAKE, Financial). The thesis behind the investment was simple- Lakeland was consistent profitable but trading under NCAV. Eventually, the company reported a big increase in backlog, a potential acquirer acquired 10% of their shares, and shares rallied anticipating a big increase in profit or acquisition. I exited at a nice profit, and everyone was happy.
Well, since that time, the bottom has really fallen out for Lake. Results for the first half of the year have been disastrous: sales are down ~10% and operating profits down 95%, to basically break even levels. The potential acquirer came out and said they weren’t interested in buying Lakeland. The drop in profitability caused them to roll over their credit line at a worse rate and with much lower availability. And, worst of all, the company lost a big arbitration award that will cost them almost $8m.
Obviously, all of these developments are (to say the least) negative. But the stock market has responded in kind- shares have fallen from $11 per share at the height of the “Lake is getting bought out” craze to just $5.25 per share.
That’s real cheap. I’ve got LAKE at just under $6.40 per share in NCAV, $9.55 per share in tangible book, and $11.40+ per share in book value (all from their most recent balance sheet, July 31).
But I don’t think it’s cheap enough. While shares certainly have some upside, this is a business undergoing a lot of change from the loss of the DuPont contract. The balance sheet is still relatively strong, but they could have trouble raising enough cash to pay the arbitration award without making serious cuts in inventory or growth investments, which would seriously hinder their ability to continue to recover from the DuPont contract. And their bank is clearly nervous- the fact their credit line got so severely cut is worrisome.
Finally, it really concerns me the Ansell didn’t see enough in Lake to continue talking to Lake about a merger. You may remember that I posted an update on Lake / Ansell that linked to this WSJ article that called Lake a “strategic entry point” for Ansell and noted there could be “significant cost synergies”. If Ansell, with significant potential synergies between their business and Lake, can’t find value in today’s prices (under 50% of book value and less than NCAV), than I don’t think I can find a big margin of safety as a minority investor w/ no synergies.
Disclosure- none.
Well, since that time, the bottom has really fallen out for Lake. Results for the first half of the year have been disastrous: sales are down ~10% and operating profits down 95%, to basically break even levels. The potential acquirer came out and said they weren’t interested in buying Lakeland. The drop in profitability caused them to roll over their credit line at a worse rate and with much lower availability. And, worst of all, the company lost a big arbitration award that will cost them almost $8m.
Obviously, all of these developments are (to say the least) negative. But the stock market has responded in kind- shares have fallen from $11 per share at the height of the “Lake is getting bought out” craze to just $5.25 per share.
That’s real cheap. I’ve got LAKE at just under $6.40 per share in NCAV, $9.55 per share in tangible book, and $11.40+ per share in book value (all from their most recent balance sheet, July 31).
But I don’t think it’s cheap enough. While shares certainly have some upside, this is a business undergoing a lot of change from the loss of the DuPont contract. The balance sheet is still relatively strong, but they could have trouble raising enough cash to pay the arbitration award without making serious cuts in inventory or growth investments, which would seriously hinder their ability to continue to recover from the DuPont contract. And their bank is clearly nervous- the fact their credit line got so severely cut is worrisome.
Finally, it really concerns me the Ansell didn’t see enough in Lake to continue talking to Lake about a merger. You may remember that I posted an update on Lake / Ansell that linked to this WSJ article that called Lake a “strategic entry point” for Ansell and noted there could be “significant cost synergies”. If Ansell, with significant potential synergies between their business and Lake, can’t find value in today’s prices (under 50% of book value and less than NCAV), than I don’t think I can find a big margin of safety as a minority investor w/ no synergies.
Disclosure- none.
