Concord Camera (LENS): Still Room to Fly
I wrote about LENS two weeks ago in a post briefly discussing my basic thesis on the stock. To briefly sum up the general idea, LENS, despite the terrible economics of its core business (single-use cameras), LENS is sitting on a boatload of cash and saleable assets while trading for just a fraction of its tangible net worth. Today, I would like to more fully discuss catalysts behind the stock’s recent run-up, and potential future catalysts for reaching what I believe to be an intrinsic value still plenty higher than the current share price.
The stock has nearly doubled in the past two months, largely thanks to 1) a reduced quarterly cash burn and increased earnings thanks to heavy cost cutting measures and 2) extraordinarily heavy insider buying by the company’s CEO, Ira Lampert (which has constituted a tremendous chunk of volume in the last two weeks). Lampert has accumulated an additional 4.24% of the company since mid-November at prices between $3 and $4.60 per share, bringing his total ownership around 8.4%. The transactions have been largely open market, with one recent 75,000 share purchase via exercisable options.
In any case, it’s clear to me that Lampert is either a) very bullish about the prospects of profitability going forward (I’m not), b) accumulating as many shares as possible at low prices before planning to commence some sort of buyout or larger tender offer, or c) crazy. A few would argue c), more would hope for b), and I speculate that it’s a), due somewhat to my tendency to be pessimistic and cynical. Which presents a problem, of course, since I don’t think the company will reach sustainable long-term profitability anytime soon, and, possibly ever (yes, I said it).
Despite having a large chunk of the single-use camera market, the market is shrinking quickly and will likely not exist ten years down the road. Disposable cameras are dinosaurs in the “image capture market,” analogous to the horse and buggy during the early parts of the 20th century. So don’t hope for miracles in this department.
The company is aware of this, and is attempting to enter other markets via the manufacture and marketing of, for instance, personal security equipment (check out their OnGuard Kids site). My guess is that they believe their current manufacturing infrastructure can be relatively easily diverted into making new widgets like these watches, while their solid relationship with Walmart can be leveraged to get these things on the shelves. This would mean low entry costs with safe demand, opening up new sources of revenue for the company. But here’s the problem with that as an investor.
Regardless of the optimism that one could easily get caught up in, investing on the basis that entirely new products will drive future growth is inherently entrepreneurial. As an entrepreneur, there’s nothing wrong with that. But as a value investor, there is. So allow me to do two things. First, the entrepreneur in me will evaluate OnGuard Kids as a new or “innovative” product (hint: it’s not), and second, the value investor in me will talk about the [better] reasons for investing.
The Entrepreneur: I just don’t think it’s a very great product. And if you disagree, I don’t think these things would ever sell to more than the overly paranoid soccer mom market. Here’s my take in short. The product is simply a watch with a loud alarm on it to warn others of danger or ward off kidnappers. That’s it. Nothing fancy. The problem with that as an innovation is that, well, it’s not an innovation. Better such watches exist, and new devices with GPS tracking power (which OnGuard does NOT have) have and will continue to hit the market (for instance, check out here). Furthermore, the market for a second-rate product in a small demographic (overly paranoid soccer mom market) just isn’t that big. And for a second-rate and cheap-looking product, the watch is expensive ($40). As with single-use cameras, don’t count on miracles. If Wal-Mart is dumb enough to stock it, don’t expect much demand from the end-customer.
The Value Investor: The company can manufacture all the new widgets it wants. None of this matters all that much because LENS is, to me, an asset play! The company is conservatively worth around $7.80 per share and likely more, given its stash of cash, reduced cash burn, and “safe” liabliities. An investor should be investing on the basis of the margin of safety and the low probability that management depletes the boatload, and NOT on the promise of entrepreneurial riches (though I do hope the company will prove me wrong). While a successful new venture leading to profitability will send the shares skyrocketing, I wouldn’t count on it with any high degree of certainty. Yes, profitability seems to be on the horizon with the reduced burn. Yes, management at least recognizes that it is selling buggies to Ferrari drivers. And yes, profitability would be especially bountiful with $16.7 million of US and $54 million of foreign (mostly Hong Kong) tax-loss carryforwards expiring in 2010 and 2016. But that is all wishful thinking.
Luckily, the company has a plethora of other catalysts to make the risk/reward ratio quite low. A 50% margin of safety, heavy insider buying, a possible buyout for that matter, very little debt, the exitting of unprofitable business lines, etc. The main risk factor is that management does something stupid with its balance sheet and pursues highly unprofitable lines of business. But given how conscious they have become about costs, this seems unlikely, and I am betting that they maintain at least the present asset base. This would allow the shares to more than double (again).
Soccer moms and Wal-Mart aside, there is an unmistakable “venture-like” element here, but like a good value investor, it’s the stodginess and cash that courts me.
Note: I own shares in LENS. I do not own shares in WMT.
David J Phillips said,
December 31, 2006 @ 11:04pm
I have to write to you that I totally disagree w. your optimistic outlook for Concord Camera.
http://10qdetective.blogspot.com/2006/11/nothing-to-smile-about-at-concord_02.html
Regards,
David J Phillips, Publisher
Joe said,
January 1, 2007 @ 1:38pm
Thanks for your insights. I agree that Lampert is overpaid and there are substantial risks with the company’s operations (i.e. they depend heavily on two customers). But again, the cash and salable assets on the balance sheet coupled with improving cash flow make for an attractive valuation with a large margin of safety. In fact, if the operations would fail entirely, the company would likely be worth more dead than alive.
Also, while its nothing too special, Lampert has agreed to take a pay cut. In their 10-K, they write:
“Mr. Lampert voluntarily reduced his base salary from $900,000 to $800,000 per annum for the period from July 1, 2004 to June 30, 2005 and also voluntarily reduced the Company’s $500,000 annual SERP contribution to $350,000 beginning with the payment that was due on January 1, 2005.”
He’s still overpaid, but it’s something…
David J Phillips said,
January 2, 2007 @ 12:42am
Ira Lampert’s base salary was increased back to $955.8 K in FY ‘06 [according to their October Proxy Filing]
re: assets –As of Sept 30th, company reported working capital of $46.4 million. If, however, you subtract the $2.4 Mill. already committed in Prepaid Expenses & assume Inventory –in a liquidation–would fetch 30 cents on the dollar [76 cents of each dollar in inventory is for finished goods], inv. value shrinks by about $15 million. So working capital is actually $29.4 million. Looking at company’s balance sheet–more conservatively–you are correct in that the company does have “wiggle-room” to execute on a new business strategy.
Additional Concerns: (1) History has not proven that Lampert & his brother are the ones to do the job, for they have taken more out of the Company than given back to ordinary shareholders! (2) OnGuard Safety watch –at $39.95 is no more than an expensive flashlight with a whistle attached (The watch does not have GPS functionality or any kind of tracking capability). (3). Company currently sells 75.4% of all its goods to WalGreens & WalMart [notorious for pressuring selling margins of its manufacturers] –ego, having WalMart as a distributor is akin to making a deal with the devil!
I DO AGREE with you that LENS looks attractive for its assets–but can Company get rid of Ira Lampert? Who is slowly bleeding the Company of its ‘attractive’ assets!
Best-
David J Phillips, Publisher
www.10qdetective.blogspot.com
Joe said,
January 2, 2007 @ 2:35am
Very good points. Ageed on all counts. As I mentioned, the biggest risk (but one I’m willing to take) is that the Lamperts drain the coffers dry. Luckily, investors have a bit of a cushion here, and they’d have to really screw this company up (which is possible, but not highly likely) for the value to dramatically decrease.
I’m certainly not investing for any miracle in OnGuard (I agree it’s a crappy product), and I do agree that the Lamperts may not be the very best for the job. However, they have done pretty well reducing cash burn, Ira’s been scooping up shares en masse, and I’m betting that 1) they keep this up, and 2) that they don’t screw up big time.
mrmonarch2000 said,
January 2, 2007 @ 12:36pm
Joe, you’re “agreed on all counts”?
Why would you value inventory at 30% of cost, when it’s known to be generating positive gross margins? How does any sort of fire sale liquidation scenario apply here? I don’t get it.
As to the need to “get rid of Ira Lampert”, am I the only one who wonders why the Beits didn’t move more aggressively on that issue last year? Do you have any idea what the cost is for a proxy contest at this level? (hint: it ain’t much.)
Joe said,
January 2, 2007 @ 1:38pm
I agree on the risk being the Lamperts, OnGuard being a second-rate product, and that having just two large customers (who can squeeze margins) is not a recipe for large profits.
I probably wouldn’t value inventory at 30 cents on the dollar (I’d more realistically value it at around 70 or so), but better to err on the conservative side. The firesale liquidation doesn’t really apply since it’s unlikely to happen, but it’s a hypothetical exercise to determine the minimum value of the company, assuming that net assets remain relatively constant and management doesn’t throw it away.
I do wonder why the Beits didn’t pursue ousting Lampert, but at this point it’s a non-issue, since it’s unlikely to happen given the Lamperts stake in the company, Ira’s ability to cite successful cost cutting for shareholders (a tactic he can use to argue that he deserves his pig pay package), and the apparent disinterest the Beits have in doing this.
mrmonarch2000 said,
January 2, 2007 @ 2:27pm
Of course unrealistic scenarios and over-emotional responses to Ira’s salary (which in fact wasn’t that much different 10 yrs ago) have led to the current buying opportunity, so you won’t hear me complaining too loudly. But really now, you can discount the inventory 30% if you like, but there’s no objective reason to do that. The company isn’t going to liquidate, that’s plain as rain. Perhaps the company will voluntarily sell itself, recent reverse split makes that highly unlikely imo, but even in such case the inventory would be valued @ 100% and not a dime less.
As to the Beits and why their inaction last year, I consider that to be a pivotal question. Their stake in the company dwarfs Ira’s, as does their avg cost (approx $9/shr). In my view, the connection between their resumed buying last summer and LENS’s strategic initiatives program launched at about the same time has become inescapable. They didn’t oust Ira because they liked what he was doing.
Granted, the Beits and OnGuard may be a non-issue @ $5-$6, but as LENS rises closer to its book value, these questions will rapidly take on greater significance. Properly identifying LENS as either asset play or growth/turnaround story will spell the difference between holding the stock closer to fair value versus selling out way prematurely. Odds are we won’t see OnGuard really start “producing” till LENS’s 1st or 2nd fiscal qtr of 2008.
Dave said,
January 25, 2007 @ 1:01am
A fascinating history
http://www.answers.com/topic/concord-cameras
If you think Ira is bad, check out some of the past few CEOs.