I’ll keep the reasons brief and in list form:
1. LENS still trades around half of readily salable assets. Its inventory position has improved as has its cash equivalents. There remains little to worry about on the liability side.
2. Despite widening since last quarter, losses have still narrowed year over year. This is clearly not the optimal scenario, but I find it little to worry about. Exiting the digital camera business was a necessary, smart move, and while it has hurt sales, it will continue to add to the bottom line and improve cash flow. SG&A continued to fall year over year (by 41%) and compared to last quarter (by 13.8%), a positive sign.
3. I now believe there are several possible catalysts to bring the price more in line with book value. To me they are a) a buyout by an outside investor or management, b) the potential exit of competitors from the unattractive SUC camera market, a boon for LENS, which might benefit from greater sales, lower costs from more volume, or, in the best case, a combination of both, c) improved margins leading to big upside given such a low price/sales ratio, and/or d) heavy institutional buying or general improvement in sentiment.
Naturally, for every favorable factor there is an opposing risk. I find those to be:
1. Management can waste money on risky or unprofitable ventures, thereby eroding the still strong balance sheet.
2. Sales are still highly dependent on a very small number of customers, exposing the company to the possibility that one or more stop purchasing SUCs. The company needs to pursue relationships with new customers if it is ever to meaningfully increase sales, and such a task is always easier said than done. Also, there is a limit to how much a company can cut costs before it simply can’t go any more, and there is always the risk that cost cutting measures simply won’t be enough to eek out profits.
3. The probability of any one catalyst driving up the price remains small, though in combination I still feel the chance is meaningful.
Basically, my stance on the company has changed little from the quarterly, and the basic thesis remains intact.