Tuesday, December 13, 2011

Meade Gets Rocked

The market has recently had a number of both euphoric "up" days and pessimistic "down" days, as strong volatility has persisted over the last few months. Whether the market has risen or fallen, however, one stock that has consistently dropped is that of Meade Instruments (MEAD). Meade was already cheap on an asset basis, but has then dropped some 40% since August. Is it worth a purchase at its current price? You decide!

Meade now trades at a 63% discount to its net current assets. This includes $2.6 million of cash, $4 million (or about 2 months worth) of receivables and $7 million (or about a quarter's worth) of inventory. Meanwhile, the company has no debt, and trades for just $3.75 million.

To trade at such a large discount to current assets, you would expect Meade to be hemorrhaging cash, but it's not. The company broke even on a cash flow basis last year, and so far has used $2.45 million building up working capital (which happens every year at this time) as we have entered its prime selling season.

If you think this company is cheap, you're not alone among value investors. Paul Sonkin is on the Board as Hummingbird owns 15% of the company.

Meade has been beaten up in the market. As such, a margin of safety appears to be present, and not a lot has to go right for the company for this stock to experience large returns.

Disclosure: Author has a long position in shares of MEAD

5 comments:

Floris said...

fully agree.

Its difficult to figure out how much they will make this year, but if you do a little bit of online scuttlebutting, you easily track that they have launched a number of high end telescopes which have gotten excellent reviews. Whether they will be a commercial succes remains to be seen but, I guess the holiday season will tell..

Long Meade

Water Investor said...

I don't think you can make the connection that Paul Sonkin thinks it's cheap too because he owns 15%. He's owned it for years and years. I presume he bought it because he thought it was cheap but his cost basis is likely much, much higher. A casual glance of this post would make the reader leap to the conclusion that Sonkin bought it down here. It shouldn't be construed as proof that it's cheap.

Taylor said...

Saj,

What is your opinion on their inventory situation? At 6 mos. ended August 2011, sales fell by 18% from the prior year period, while finished goods inventory increased by 44% over the same period. This contrasts with a 6.5% increase in sales from Aug. 2009 (6 mos. ended) to the same period in 2010, while finished goods fell by 27.5% over that period. Is this cause for concern? It seems as though the margin of safety may be large enough to offset potential risks here.

Saj Karsan said...

Hi Water,

I agree, you're right.

Hi Taylor,

Total inventory is still lower than it was at this time last year. If there is a risk with finished goods inventory though, I agree with you that it's fully covered by the margin of safety.

ShortBus said...

"spectacular stellar year end savings". "save over $399".

Do they do this kind of desperate selling every year ? Usually when I see that kind of front page on a web site, I know that revenues are going to be bad.

This looks like a dying business and a value trap.

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