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Diamond company Lazare Kaplan recently reported lackluster results for the first quarter, losing $1.8 million on sales of $139.8 million. Sales were flat with same quarter last year, but the company earned $900K during that period. Lazare blamed the loss on flat sales, and margin pressure from increasing costs. Not surprisingly in an economy where consumers are ratcheting back spending, sales of polished diamonds suffered, while sales of rough diamonds increased.

Still trading Below Net Current Asset Value
In terms of operating performance, this company is nothing to write home about. Despite $538 million in fiscal 2006 sales, the company earned just $1.5 million, for a sub .3% net profit margin. However, Lazare still trades below its NCAV, as it did when we initiated research this past January, and ultimately took a position in March.

With a net current asset value of $76.8 million, and market cap of $67.2 million, Lazare currently trades at 1.14 times NCAV. We'll admit though, the capital structure of this company is of concern: short term debt of $69 million, long term debt of $64 million, with just $6 million in cash.

It's the Inventory
What is compelling about Lazare is the company's inventory of $15 million in rough diamonds and $111 million in polished diamonds. These are carried at the lower of cost or market, and are the reason we continue to own LKI. This is another asset play, where we believe the value of inventory is potentially worth a great deal more than carrying cost. A risky strategy? You bet.

Price Action
Shares of LKI are up about 6 percent since we initiated our position, despite pulling back from a high of about $10 a few months back.

The Numbers
Current Assets: $262.7
Current Liab: $122.1
Long Term Liab: $ 63.7
NCAV: $ 76.9
Book Value: $ 11.45
Price: $ 7.75
Pr/Bk: $ 1.48

LKI 1-yr chart:

Disclosure: Author is long LKI

Source: Lazare Kaplan Trading Below Net Asset Value