Leo,
In reading management discussion of the 10-k and the most recent 10-q
as well as the financial data I see mostly red flags.
This is a seasonal business with the third quarter making or breaking
the year.
Production is mostly based on forecasts.
During the high season in general and especially now the company is
strapped for cash delaying payments to vendors, never a good thing.
The sonar market in NA is mature. Only if the company can increase its
market share and/or can become more international will there be growth
in sales.
The GPS market is expected to expand but LEIX's success in contingent
on the company keeping pace with its competitors.
Sonar sales are falling, GPS sales are increasing. Margins have been
eroding significantly in 1997 (compare Cost of sales, which 65.9 %,
66.2 % and 74.3 % for 1995, 1996 and 1997 respectively).
Qualified labor problems at the Tulsa plant and difficulties in the
startup in Mexico (this will create bigger headaches in the future).
They missed the season in 1997.
First qtr was only slightly better if you consider that total costs
decreased by $1,379,000 primarily the result of substantially lower
advertising and marketing expenses. So no real improvement yet.
Also, cutting back in these areas will have some effect on sales
in the future.
The problems, they promised to address at the end of fiscal 97
(7-31-97), still existed at the end of the first qtr of fiscal 98.
They are tied hands and feet because of lack of finance having maxed
out on credit line and other arrangements. They cannot afford much
more bad luck.
At the current price, the market value is a little over 2.6 times book
value, quite generous. Given the position the company is in it is
highly unlikely it will trade at higher multiples any time soon.
For this to be a four-bagger or five-bagger sales and profits must
start growing at a very high rate and very soon. If they want more
market share they either need to offer a superior product or a like
product at a cheaper price. Difficult to see where the growth will
be coming from.
Let's assume there will be stronger growth and the stock may trade
at 4 times book. If the stock is to reach say $30/share (a four-bagger),
book would be $7.5/share or $22.5, so they will have to earn $13.5 mm
very fast. How long would that take?
I am also concerned about their inability to control production at Tulsa
and missing the season altogether. Aside from problems they will
encounter in Mexico, this was not to time to embark on that venture.
While labor cost may be lower, by the time you get the plant up and
running with the skilled labor they can't even find in Tulsa, any
advantage may well be gone. I am familiar with a few instances where
that occurred.
Finally, there is no liquidity in its stock. If 100 shares can make it
drop 1/4, imagine you are pressed to sell a few thousand shares.
Frankly, I see little good happening here any time soon.
There are better places to go.
JMHO
Jan |
