Thursday, May 30, 2013

Cash Burning A Hole In Your Pocket? Jump In A LAKE

It has been a disastrous year for Lakeland Industries (LAKE), and its stock price reflects this. While the rest of the market reaches for new highs, shares of Lakeland are getting bent over; shares are down 70% from their 2012 highs! But has the market overreacted?

The company trades for just $18 million, but has net current assets of $26 million. In addition, the company has North American land and buildings carried on the books at $8.5 million, land and buildings in Brazil carried at $1.5 million, and land and buildings in China carried at $2.5 million. If you exclude the company's Brazilian operations, which the company is trying to sell, the company showed positive income from continuing operations in 2012.

What made the year so disastrous? First, DuPont ended a licensing agreement with Lakeland, causing a large sales disruption. Then, the company's Brazilian operations turned south, resulting in massive write-downs and a costly arbitration judgment. This "Material Adverse" event was enough to trigger a loan default under the company's loan agreement with TD.

Management has been trying to pick up the pieces. The company now appears to have replaced the sales caused by the loss of the DuPont contract. Management has also indicated that it has found a lender to replace the accelerated TD Bank loan.

In such situations, an investor might be tempted to flee for the exit; indeed, most investors have, as evidenced by the stock price. But there are reasons to be optimistic here. Not only is the stock price cheap relative to the company's assets (as discussed above), but management's incentives are aligned with those of shareholders. CEO Chris Ryan owns almost 10% of the company, and unlike other managers, is pretty candid with shareholders about his intentions, which is pretty refreshing. Below are some excerpts from the company's latest conference call:

"We are working diligently on rightsizing the Brazil operations. We are looking into potentially selling this operation, while at the same time working on restructuring the operation."

"...we have signed a commitment from a potential senior lending bank. They have done all their due diligence. We are working through the issues remaining to close it."

"I pretty much agree with you...if we can get a good price for the shareholders, we would be open for sale." (Following a comment in which a shareholder suggests selling the company)

"...pretty comfortable that we'll be able to get some much better margins in the U.S. compared to our recent history in the U.S. going forward." (CFO comment)

"It's roughly $8 million of...inventory sitting in Brazil...receivables of about...$1.8 million or so, and the plant and equipment $2.5 million of book value in that range." (CFO answering question about how much Brazilian operation might be worth)

"We can't comment on any conversations because they filed a 13D. But there haven't been too many conversations between us." (Following a question about whether Ansell may be interested in acquiring the company)

"they're all looking for EBITDA, okay? And if you don't have EBITDA, their attitude is your worth 0, okay? ...[I]t is a preoccupation with EBITDA...Wouldn't matter whether you had $100 million in cash if you had 0 EBITDA, you're still worth 0. This is the attitude out there. Of course, it's a negotiating attitude because if you look at our company, we have receivables that are convertible into cash relatively quickly. We have sold some real estate assets at book value. Jesus Christ, everybody is saying we're not worth book value, but we can sell our real estate at book value. So if we can sell real estate at book value and you can collect receivables at their stated value, then you have cash. And again, you have people saying, "Well, if you're a company with $100 million of cash but no EBITDA, you're still worth nothing." That's their attitude. So what can I say? I guess we have to build up some EBITDA, and then they'll have another reason why they can't pay at the market price." (Following a question about conversations with potential buyers)

"It's been a tough quarter for us, and we hope we can do better next quarter."

There's a lot more on the call which offers insights into what's going on in the company. I highly recommend it to those interested in the stock.

Disclosure: Author has a long position in shares of LAKE


Anonymous said...

In 2012, the management (+ BoD) earned $1.8 mn. For a company with market cap 20mn, this is no small sum. The CEO got 0.5% of the company in RSU just last year!

I don't see the management being on the same side as the shareholders.

Mike said...

Is there news, or did you just move the market +16% with your post today?

Anonymous said...

I think he moved it...I didn't see anything come through.

Same thing started happening with Whopper 4 months ago or so

Anonymous said...

Why has A/R been so high for so long? If it's readily convertible to cash (no credit risk) what's the holdup?

Saj Karsan said...

Hi Mike and Anon,

I think it was Whopper, as this article came out ahead of mine:

Hi Anon2,

A/R is likely converting into cash all the time. I think the idea is that if sales were stopped, the A/R is worth its stated value, therefore someone should be willing to pay for that. (In the same way as real estate sold would be worth the same as its stated value, if sold at book value, so someone should be willing to pay for that.)

Mike said...

Hi Saj, what are your thoughts on the impact of sites like SeekingAlpha for value investors now that any individual can make posts that move markets? Does that make the game more competitive and the market more efficient?

Saj Karsan said...

Hi Mike,

I really don't know. I'm inclined to think this doesn't really change much, though. So Seeking Alpha has joined all the 'professional' research firms that can move markets on publication. I don't think there's any reason to believe Seeking Alpha is any better than the existing firms at moving the market towards efficiency; they could be just another force pushing investors towards short-term trading. But I can't say for sure.

Anonymous said...

amazing business! they managed to grow non-dupont sales by 50% in 1 year, so they didn't skip a beat. google, step aside, please.

maybe that's why those receivables are so high.

Anonymous said...

Hi Saj,

Any updates to your analysis on Lakeland?

Big Fan

Saj Karsan said...

Hi Big Fan,

Not really. We should be hearing from the company pretty soon, though.

Anonymous said...

Hi Saj,

I have a quick question on Lakeland, do you have any insights into what comprises "Other Assets" on the B/S. I'm also curious about why the increase in today's announced earnings to 1,663 from 478.

So far, seems like a good candidate for value in action given recent earnings developments.


Saj Karsan said...

Hi BF,

Looks like it's mostly prepaid bank fees for the new loans, as per the 10-Q

Anonymous said...

Thanks Saj. How are you feeling about today's results?

Anonymous said...

This just reminds me of how they say most of the price moves on a stock happen on a few days of the year.

Find values, hold, and if your analysis is roughly right, you will have a few losers and many winners. The "hold" part might be even more difficult than the "find values" part.

Saj Karsan said...

Hi Anon, I quite liked them!

Gregg said...


If you still follow it, I'm wondering if you had any thoughts on LAKE after earnings yesterday?

I thought everything was quite positive and bought more into the sell off today.

Saj Karsan said...

Hi Gregg,

I still like it.