Concord Camera (LENS) has experienced some extremely difficult years as the digital camera market pricing has collapsed leaving the company with significant losses and restructuring charges. Over the last six months the numerous restructuring plans have finally begun to bear fruit, but nobody has noticed with the exception, that is, of the CEO, Ira Lampert, who has been an aggressive buyer of the shares. The shares have recently begun to rally despite a usually toxic 1:5 reverse stock split. Having been burned badly with these shares investors have stayed away, apparently missing the turnaround. But, there is much more here than just a simple turnaround story, namely some cold hard cash!
We could recount in intricate detail the company’s (and shareholders’) pain and suffering over the past three years, which would make great reading for students of business history,but what is most relevant for our analysis is what now remains of the company. The company is now essentially a manufacturer of single-use cameras in China which are sold predominately to Wal-Mart and Walgreens (75% of sales in the fiscal quarter ending in September). The important emphasis here is “single-use”. The company has completely de-emphasized digital cameras. The competition in the digital camera market has eroded margins and pricing to the point where the company can no longer compete. The business model is now very simple: use its strong and competitive manufacturing operations in China to support the single-use market. (The company still manufactures some cheap (below $30) traditional cameras, but the company is continuing to de-emphasize this market.)
Okay, I know what you are thinking. How viable is the single-use market? According to industry data, after years of robust growth, the single-use camera market reached its peak of 450 million units sold worldwide in calendar year 2004. Total worldwide sales of single-use cameras declined to 409 million units in calendar 2005 and are expected to have declined to 374 million last year. The company believes, however, that single-use cameras remain a large and viable category. The company claims that it is currently the third largest producer of single-use cameras in the world.
The turnaround began in the fourth quarter ending June 30th 2006. During the fourth quarter, after years of losses, the company turned cash flow break-even. The improving margins and cost reductions finally began to impact the bottom line. The company made no note of its accomplishment in its earnings release and the stock and investors did not react immediately. During the first quarter of the current fiscal year the company had a free cash flow deficit of $700,000, which is not a big deal for a company with a cash balance of $42 million!
The turnaround sounds mildly interesting, but what makes the story enticing is the company’s cash. The company has about $7.30 of cash per share and about $7.70 per share in net current assets!Thus, at $4.55 the shares sell for 62% of cash and 59% of net current assets, valuations that are consistent with a company in imminent collapse which is clearly not the case here. In the current dessert of value, Concord provides a compelling valuation.
1) Ira Lampert: Mr. Lampert is the dogmatic and focused CEO of Concord. He is clearly over paid and difficult to work with but he has a relentless focus on returning the company to profitability. His management style may make it difficult to attract talent and investors. He may be resistant to returning the cash to shareholders. His recent purchase of the stock provides strong confirmation of his belief in the future of the company.
2) MT Trading: This group holds almost 24% of the company’s outstanding shares. They purchased shares aggressively at much higher levels a few years ago. They were very loud in demanding change in the beginning, but have been very quiet over the past year or so. They may have arrived at some type of understanding with Lampert. They are clearly not happy with the valuation and will be a force in getting the cash out of the company.
3) The Cash: Clearly, with the company now close to profitability and the market prospects limited, the company does not need the full $42 million in cash.What will happen to this cash? A cash distribution to shareholders or buyback is possible, but I would not expect it. It’s difficult to predict, but even a poor acquisition would be a benefit to shares that trade materially below their cash balance. At a minimum, the cash provides us a significant margin of safety.
4) Concentration of Customers:There is no question that this is the most significant issue with this company. With 75% of first quarter sales to Wal-Mart and Walgreens any hiccup here would hurt. The mitigating factor here is that, based on my research, the company’s China factory is very efficient and competitive. These are obviously the key ingredients required to remain a viable supplier to Wal-Mart.
This situation is not without risk, but the margin of safety is huge here. The indications from the performance and the CEO purchases are that the turnaround has arrived. The valuation of the stock at less than 60% of working capital indicatesthe company is close to folding its tent which is not anywhere close to the truth. There may be some more puffs left in this cigar butt!
1) Market recognition of the value of the shares.
2) CEO continued stock purchase.
3) Significant dividend or buyback.