After grabbing news headlines around the world in October, Ebola has all but disappeared from the media headlines. As a consequence, many Ebola-related equities have given back a substantial part of their stock gains. Lakeland Industries (NASDAQ:LAKE) is no different from the rest: shares of the hazmat manufacturer now trade around a third of their peak valuation on October 13th.
Lakeland Industries reported third-quarter earnings on Wednesday, reporting a loss of $0.42 a share on revenues of $25.1 million. Revenues were up 10.2% year-over-year, while gross margins increased 12.2% year-over-year to 34.3%. The company had several significant one-time charges for the quarter, including a $0.35 per share charge for early extinguishment of subordinated debt, and a $0.11 per share charge for equity compensation related to a change in performance level for restricted stock. Stripping away the one-time charges, Lakeland Industries' net income would have been $0.20 per share versus $0.05 in Q3 last year. One reason for the significant improvement is the Ebola sales beginning in October. Because of the Ebola run-up in October, Lakeland Industries also raised $11.1 million, and used the majority of that money to pay down $9.9 million in debt, and as a consequence, EPS should be $0.16 higher for FY 2016.
I maintain my neutral point of view on the stock. In the short term, Lakeland could be a speculative buy a few days before the next earnings report, as Q4 2015 will be the first quarter that reflects the full impact of the Ebola orders, and the stock could spike in anticipation of a good report (just like it did on November 25). In the long term, however, the company still makes commodity products that generate marginal returns on capital. After the Ebola business dies down, Lakeland will find it extremely difficult to find another growth engine to justify a high stock price. After paying off its subordinate debt, I estimate the company has an ex-Ebola earnings power of $0.50-$0.75 per share. A PE ratio of ~10 gets me a target price of around book value for the stock.
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