Wednesday, October 17, 2012

Meade Out of Focus

What a turnaround at Meade, and not in a good way. When Meade was brought up on this site as a potential value investment just over a year ago, its net cash position matched its market cap while its cash flow was positive. Since then, its market cap has fallen, while its cash position has fallen even more. As of its latest report a few days ago, Meade's cash position is now just $670K, down from $5 million 1.5 years ago, putting this company's future in doubt.

At the heart of the company's problems appear to be a product transition that is poorly executed. New product delays have resulted in unfilled orders, leaving the company with lower revenues and yet all the expenses associated with launching a new product. For a company with a strong balance sheet, a new product delay could simply be a temporary blip on the road to future success; but for Meade, the cash position has now dwindled significantly, while the company's line of credit is rather small and at the mercy of its lender.

The company's latest financials describe the situation about one month and a half ago. Unfortunately, it appears as though Meade's execution issues appear to continue to plague the company even a month and a half into the new quarter. Try to order the company's new LX800 and LX600 product lines online, and it's clear the products are not available (backorder and pre-order, respectively).

I have tried to talk to major shareholder and director of this company Paul Sonkin, who follows me on Twitter. But he refuses to discuss the company, citing his directorship.

I also inquired about the LX800 at my local Meade dealer (as provided by Meade's website), only to have the store's staff push me towards more "reliable" competitor products. When I continued to ask about the Meade products, I was told there are software issues that need to be debugged, and that the store is hesitant to order and promote these products until the problems are solved. Considering Meade's bloated inventories and weak cash position, this isn't a good sign.

Thanks to Meade's worsening financial situation, Meade moves from the Stock Ideas list to the dubious Value Fail page. That's not to say the company can't find a way out of its current mess. But for value investors who seek downside protection, this stock may no longer qualify; thanks to the company's missteps, downside risk has increased tremendously in the last few months, even as the share price has fallen!

Disclosure: No position

4 comments:

Anonymous said...

What's most confusing about your post is the apparent underlying premise that you're buying these stocks based on some expectation of growth.

You're not concerned about the net current asset value, but appear to concern yourself with the capital structure of an astronomical device retailer. Is this within your circle of competence? Given the range of stocks you're covering, I'm going to guess no. The fact that you're actually simulating the experience of a retail customer visiting Meade's website is also quite odd. Meade isn't a customer-facing company.

Anonymous said...

A proper focus on MEAD stock would home in on the following excerpt from their 10Q:

" "The Company typically experiences increases in accounts receivable and inventories and a corresponding decrease in cash beginning with the end of its first fiscal quarter and culminating with the end of its third fiscal quarter. Receivables and inventories then typically decrease, and cash increases, at the end of the Company’s fiscal year."
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"The Company began advancing on accounts receivable in September 2012 in order to fulfill its working capital requirements. Based upon expected order fulfillment and results from operations, the Company expects that it will need to continue to rely on its credit facility for working capital for at least its third quarter. If its lender restricts, reduces or eliminates the Company’s access to credit, or requires immediate repayment of the amounts outstanding under the agreement, the Company would be required to pursue additional or alternative sources of liquidity such as equity financings, a new debt agreement with other creditors, or liquidate assets. However, the Company cannot assure that such additional sources of liquidity would be available on reasonable terms, if at all."

There is a catalyst on the horizon. The remaining question is a potential investor's estimate about the inventory discount they'll have to surrender to stay afloat. When you're peddling telescopes just to stay alive and the buyer knows you need this sale just to stay alive, you lose a ton of bargaining leverage. They might just go bankrupt.

Anonymous said...

I think MEAD is in trouble.

1. Inventories have been increasing for the past 6 months and most of the increase is in raw materials.

2. Revenue has reduced, but the operating costs have stayed the same.

3. 1 & 2 have resulted in cash outflow and reduction of cash reserves. Now current assets without inventories is lesser than current liabilities.

They need to get their production delays resolved and get new products out soon. Backorder and pre-order status needs to be changed. Don't know if it will actually happen.

Anonymous said...

Looks like MEAD found a way out of its past mess. It is to be acquired by Jinghua Optics & Electronics, and Mr. Market reacted favorably to the news...it's price, back up to 3.40 as at late May 2013. Perhaps it may have made a Value Save list?

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