Long-time readers may recall our many postings on diamond company Lazare Kaplan (LKI) throughout the years. A perennial net/net, its a company that we owned for a 2 year period until February 2008, when we sold out at around $10. Truth is, we made a little money (26%), but the story had gotten dull, and we were convinced that LKI was just one of those companies that would forever trade below net current asset value.
Interestingly enough, in October 2007, Lazare announced a bizarre 1 for 101 reverse stock split, followed by the buy out of any shareholders owning less than 1 post-split share, and then by an immediate 101 for 1 forward split. This was intended to reduce shareholder roles to save an estimated $25,000 per year in costs. At the time, we thought that the company was aiming to go dark. That has not happened.
In the months following our sale of LKI, the economy all but imploded, and LKI fell to as low as $1.05 per share, about 10% of our exit price. While a diamond company is not a great place to be during a recession, we were compelled to take a position in March, when the stock was at $1.16. We did so at great peril to our capital, given the company's declining performance, and ample debt.
The latest quarter tells the tale quite well. Revenue fell 49% from the same quarter last year, and LKI lost $3.6 million, or $.43 per share, versus income of $3.3 million, or $.40 per share. Clearly, not many diamonds change hands during a deep recession, when discretionary spending falls dramatically, and retailers become reluctant to carry inventory, especially expensive inventory.
The company also has a lot of debt for you average $20 million market cap company (less than $10 million when we took our position): $36 million in short-term, and another $40 million long-term which is due in May, 2010. Although the company ended the quarter with $13.2 million in cash, this is a potentially dangerous situation, and not one that we'd normally get involved with.
But Lazare also has something on the books we believe to be quite valuable: namely an inventory of $125.7 million of rough ($36.6 million) and polished ($89.1 million) diamonds. Furthermore these diamonds are carried at the lower of cost or market. While we typically don't care for net/nets whose current assets are concentrated in inventories (or receivables)for that matter, this is the kind of inventory where we are happy to make an exception.
Of course further success, and company solvency for that matter, is dependent on an economic recovery. While diamond prices are starting to show signs of a recovery, the consumer is not there yet, and Lazare has many challenges ahead.
One little known, but interesting fact about LKI is that Chairman of the Board Maurice Templesman is perhaps better know as Jaqueline Kennedy Onassis' long time companion and son Leon serves as President of the company.
Lazare Kaplan Intl:
- Ticker: LKI
- Price: $2.46
- Shares Out: 8.25
- Market Cap: $20.3
- NCAV: $56.3
- NCAV/Mkt Cap: 2.77
- Tangible Book Value/Share: $11.46
- Average daily volume:15,700
Disclosure: The author has a position in Lazare Kaplan.