As Expected, Lakeland Industries Sees No Benefit From One-Time Events

| About: Lakeland Industries, (LAKE)

Summary

The company reported Q3 earnings, missing consensus estimates with 6% revenue growth.

Management expects revenue to decline next year by 5 to 10%.

Despite moving Brazilian business to discontinued operations, growth is still quite modest.

The company is ramping inventory, despite admitting that they currently don’t see any increase in global demand.

As a low-growth industrial company, this company should trade at 5 to 6 times EBITDA and trade for $10 per share.

On Tuesday after the market close, Lakeland Industries (NASDAQ:LAKE) reported their third quarter results. As I have written previously, LAKE is an industrial protective garment company that generates 95% of its revenue from industrial companies maintaining OSHA compliance. This is a very stable, low-growth industry. Despite many claims that the company benefits from global terrorism and viral epidemics, this has never been the case. For more than a decade, the company's revenue has stayed relatively stable, around $100 million per year.

It seems appropriate to provide an update after the company reported their Q3 earnings. As expected, despite bird flu fears and continuing Ebola cases, the company reported topline revenue growth of just 6%, and actually missed consensus estimates. While 6% growth is just fine for a low-growth industrial company, it further proves the point that LAKE doesn't deserve a premium multiple for incremental revenue related to one-time events that in reality rarely provide much benefit to the company.

In addition, on the conference call, management was asked if a $24 to $25 million run rate is an appropriate revenue estimate as we think about next year. Management agreed, implying $96 to $100 million of revenue, a 5% to 10% decline from this year's expectations.

Several comments were made after my previous articles claiming that the company is in fact growing in the US, but the growth is offset by the decline in international operations. This quarter, the company moved their Brazilian business to discontinued operations, which gives investors a much better view of the company's overall business. With the Brazilian business now excluded, based on those comments, we should be seeing significant growth. However, we can clearly see that this isn't the case. It's true that the Brazilian business was in decline, but excluding that business, we still aren't seeing meaningful growth.

In the press release, company management indicated that this is the most normal quarter we will see from LAKE, as there was very little one-time revenue in the quarter related to the bird-flu, offset by some Ebola revenue in the prior year. These comments from management appear to make it unreasonable to expect growth at a level to support a higher multiple.

On the conference call, management attempted to fan the flames of excitement related to potential income related to Ebola, by pointing out that we continue to see cases. Unfortunately, this is a story that we have heard one too many times. Ebola is a story that has been going on for more than a year. It's true that we have seen lingering cases over the past several months, but if American and European companies and hospitals didn't stock up on protective garments when the epidemic was global and there were cases in the US and Europe, why should we expect to see any orders come in now? I don't believe there is any reason that we should. Even at its peak, Ebola revenue was only $5 million.

Doubling down on this strategy, the company decided to increase inventory on the chance that global demand increases. The company acknowledged that they don't see this demand yet, and may have to scale back if they are wrong. I can't imagine shareholders will be pleased with this use of capital, especially considering they diluted shareholders less than a year ago by raising capital.

As you can see, this quarter provides further evidence that LAKE is merely a stable, low-growth industrial company. Despite wild swings in the share price from investors that misinterpret the impact of global news, revenue continues to be constant around $100 million annually, as it has for more than a decade. As a company with little growth, and a strategy of ramping inventory without any known demand, we continue to believe that this company should trade at 5 to 6 times EBITDA, making it a $10 stock.

Disclosure: I am/we are short LAKE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Medical Appliances & Equipment, Earnings
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