Concord Camera (LENS) represents an attractive value investment with a strong short term catalyst. The company’s shares are currently selling for less than the company’s cash balance, less than 50% of net current assets and at 40% of tangible book value. Concord was written up in VIC over three and one half years ago. The situation and the price of the shares have changed dramatically since then.
Concord sells a large line of low-end digital, traditional and disposable cameras. The cameras are mostly manufactured in the company’s facility in China. The company sells products directly to retailers (77% of sales) and also manufactures for other companies. Wal-Mart and Walgreens represent 19% and 11%, respectively, of fiscal 2004 sales. Kodak accounted for $40 million of manufacturing sales in fiscal 2004, but the company has been notified that Kodak will be begin manufacturing in-house beginning in calendar 2005. Concord expects to only to have $14 million of sales to Kodak in fiscal 2005. The company has expressed some confidence that it will be able to replace the Kodak sales. The company has a licensing agreement with Polaroid and with Jenoptik (a recognized European brand). The company would significantly benefit from additional licensing agreements. (I refer everyone to the company’s 10-K to get a better perspective on the company’s business.)
The company had a very difficult fiscal 2004, which ended June 30, 2004. The company simply failed to execute in the digital market. The company was late in its product introductions and went to market with overpriced digital cameras as market prices were collapsing. This led to lower than anticipated sales, excess and over-valued inventory, under absorption of overhead and losses. During the year the company took an $11.1 million charge to lower the carrying value of the inventory and $1.8 million to reduce the value of the molds needed to produce these products. The reported loss for the year was $31 million but the company’s cash flow was a loss of only about $7 million. (Depreciation is defined as earnings adjusted for depreciation, deferred taxes, extraordinary gains, goodwill impairment and inventory write-offs.)
To further augment their problems, their CFO resigned during the year. After extensive negotiations, the company hired Donald Dawn, former CFO of Jet Aviation Group and partner at KPMG, as its new CFO. He only lasted two weeks! The company claims that the resignation was unrelated to the company’s accounting principles and practices. Unfortunately, one has to be a little skeptical of this assertion given that the company recently disclosed that the company’s auditors have noted several reportable conditions involving the company’s internal controls. The auditors considered one of these conditions a material weakness. The material weakness relates to the company’s closing process. The auditors believe that the closing process does not insure that all material errors to accounts that involve significant estimates will be identified on a timely basis. The company has assigned a high priority to finding a new CFO and fixing these deficiencies.
CEO, Ira Lampert, asserted during yesterday’s quarterly conference call that the company is taking significant steps to address the operating problems experienced last year in the digital business and expects to get them under control. The digital camera industry continues to grow rapidly and with a good strategy and execution the company should be able to take advantage of this trend. In addition, the company is undertaking a comprehensive strategic review involving both external and internal participants. The company would not discuss the details of this review as it is still on-going, but Lampert remarked that investors might be surprised by the results.
The balance sheet gives the company tremendous flexibility in engineering a turn-around. The company has $58 million in cash ($2.01 per share). Working capital is $100 million and net working capital is about $98 million ($3.40 per share). The company has about $9 million of short term debt and no long term debt. The company, thus, at its current price of $1.65 sells for about 50% of net working capital and below its cash position.
You may now ask, “Yes, we have a very cheap company with operating problems. What should give us any confidence that management will do what’s necessary to realize value for shareholders?” Over the past several months an investment partnership, MT Trading LLC, has been aggressively accumulating shares in the company. This entity is apparently managed by Mark Paley, who is a pricipal with Harvest Investments LLC. The MT group now holds about 9% of the company’s outstanding shares. It was unclear what the group’s intentions were, that is, until yesterday’s conference call. During the conference call a representative of MT Trading joined the call and essentially gave the company an ultimatum. The representative, who was probably Mark Paley, asserted that the performance of the company was totally unacceptable and that they would be assertive in seeking change. The representative asserted that the company’s costs are out of control, management contracts are excessive and dramatic change was needed. The company was given three options:
1) The current board of directors must force dramatic change.
2) The company hires an experienced turn-around artist to restructure the company.
3) The company immediately puts itself up for sale.
Moreover, the company was given three weeks to respond to MT or they would take action. In addition, MT asked for two board seats.
The company did not directly respond to the MT representative. Subsequent callers asked for a company response on the issue. Lampert reasserted that the company was conducting an extensive strategic review and would work to maintain the company’s book value, liquidity and intrinsic value.
Thus, we now have an undervalued company with some obvious operating problems, but with a strong short term catalyst to force management to realize the value of the company’s assets.
The recent ultimatum by MT Trading, a 9% holder of the company's shares, giving the company three weeks to take aggressive action to realize shareholder value provides strong impetus for management to take significant action.