A few months ago, I mentioned Stephan Co (SPCO) and its rather morbid catalyst.
Well, the company recently put out a press release, and (unfortunately) it looks like the company is going to focus on growing, not selling itself.
Even more unfortunately, the company is cutting their dividend and ceasing share buybacks.
But don’t take my word for it. Check out the release the company sent to all its shareholders below.
Now, I don’t think this press release makes much sense for a couple of reasons.
First, the company’s business continues to deteriorate. Here’s the most recent income statement.
Given the company’s business has been declining for years, I don’t see how installing a new CEO from outside the firm and giving him free reign to invest makes more sense than selling to a competitor who could realize synergies and would know what they’re doing.
Second, I don’t see how cutting the dividend and ceasing share buybacks make sense. Here’s their most recent balance sheet.
Now, the company owes their deceased ex-CEO’s family ~$1m, which isn’t on there. But even if you factor that in, the company has more than $1 per share in excess cash and, at today’s share price of ~$2.20, is trading for <80% of NCAV. While I don’t understand why investing into the business instead of selling the company makes sense, I really don’t understand why they need to cut the dividend and cease share buybacks. There’s almost no way the new CEO could invest all of this excess cash into the business (short of a huge acquisition), and even if they could, I don’t understand how making an investment in the business makes more sense than buying back shares at these prices.
So, there you have my little rant. I don’t understand the new strategy at all, and I wish the company would just sell themselves.
That said, it’s hard for me to imagine they aren’t still in play: I doubt the deceased CEO’s family wants to hold such a big chunk of shares now that they’re not associated with it, and there is still an activist on the board who has pressed them for a sale before.
And shares still seem too cheap to ignore at these prices. Even after adjusting for the $1m payment, book value is almost $6 per share and NCAV is close to $2.75, both well in excess of today’s $2.20 share price. If the new CEO can get the company anywhere close to their profitability level from three or four years ago, the stock could easily push $6+ per share. If not, the NCAV and strong balance sheet should provide very strong downside protection.
Disclosure- Long SPCO
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I have to laugh at this post, when I read the letter it was a classic read between the lines note. All of the same board members who wanted a sale are still there, a temporary CEO was picked, and the company is working to bump up sales in the short term. Why bump up sales? They want to look better to a suitor. The dividend was puny and if that small amount of money can ramp things up I’m happy to forgo a dividend for a sale in excess of book.
This letter didn’t disappoint me, it was encouraging that things are moving along.
Maybe my response wasn’t wooden enough… I think patience will be rewarded with SPCO.
This letter looked like bad news to me initially, but after reading your follow-up (relationship between Barone and the new CEO Smith), Nate’s comments and thinking about the situation some more I have changed my mind.
I think this company will be sold. All the parties involved seem to have an interest in getting a transaction done in the not too distant future. You have: Ferola’s estate, Yorktown Avenue Capital, Barone and director Shouky Shaheen. Together they control 50%+ of the shares. Barone is in his 70′s and Shaheen is 82 I think. I just don’t see why any of them would be interested in prolonging the current situation more than necessary. They all have capital tied up in an obscure, illiquid company listed on the pink sheets. The share price is depressed and has been for a long time. Discontinuing the dividend and buy-backs won’t help reverse this either obviously.
So what is their strategy? I think Nate is right.
Try to get the optimal results out of the assets that are there and then try to make a transaction. I can understand that now would not be a good time to sell since results have deteriorated. So they bring in a CEO to restructure, cut costs and try to improve revenues. Hopefully results do improve and value is maximized for all the parties involved.
This letter seems scary, because when you read language like this from management (‘new CEO’, ‘discontinue the dividend’, ‘position the company for revenue and earnings growth’), usually they’re thinking about making a big (and often dumb) acquisition. I don’t think this is likely here though, the incentives for everyone involved seem to favor a sale of the company.
I do wonder how much interest there will be from other companies in acquiring Stephan Co.
Long SPCO.
depressing the stock price through clearly shareholder unfriendly actions is not typically the first thing you do when selling a company though, most buyers will anchor on the stock price especially if it’s another public company, no board wants to stamp off on an acquisition done at 100% premium……I would think if they were going to sell the company they’d issue a large one time dividend so they all get cash for new porsches and vacations and then sell this thing shortly thereafter. I’m new to the situation and still digging but I don’t see the clear cut statement of imminent sale between the lines in this letter but I am also not familiar with this story here yet
anyone have any background on this new guy? track record, background, goals, why hired, etc
I looked at this before Frank died. The guy’s payment scheme was an act of financial terrorism — by my calcs he would have been owed $15 million if the business was sold pre-death. I literally asked one of the individuals more deeply involved in the situation about frank’s health, etc, because this was uninvestable previously.
However, there is still some sketchy stuff going on. Firstly you have to always distrust companies based in Boca, which is the only place that rivals Chinese WOFEs for fraud and financial crime. Secondly if you look at their crappy website, they claim to have 400k ft2 of real estate. Then if you look at the last 10k the list of properties only adds up to about 1/2 of that. Then, if you google maps the properties, it looks like they’re actually located in a few much smaller, much shittier businesses. I also have a zero percent rate of getting the company to call me back, and the receptionist is extremely hostile if you give her a ring.
Life is too short for this one, imo