A few months back, I mentioned the Stephan Company (SPCO) a few times. It was a really interesting thesis: Stephan was trading at a fraction of NCAV and a huge discount to book, and their CEO / major shareholder had just passed away. Given that, it seemed likely that the company would put itself up for sale and investors would realize a pretty nice profit. A few months later, the company cut the dividend and announced some other stuff- I took this as a pretty negative sign (though there were some silver linings), though some other commentators fanatically disagreed with me (and posted so in some rather arrogant comments).
Unfortunately, since those posts, things have continued to deteriorate. The company reported 3Q earnings that were, to put it lightly, a complete disaster. The company wrote off $5.1m in inventory (plus a $189k disposal fee!) , saw revenues decline by almost 20%, and had to record a one time fee of $800k related to theri old CEO’s death benefits. Add it all up, and the company loss $6.5m in the 3Q, an operating margin of -150% (that’s negative 150%!!!!) on revenues of $4m.
Yes, a lot of that is related to one time and charge off items. But I still think there’s a lot to be concerned with here. The on-going revenue declines are incredibly concerning, and even after adding back the one time charges, SG&A is running high than it was last year. It’s all very, very troubling.
Still, there are positives.
The balance sheet remains rock solid, with $5m of cash versus no basically no debt (that’s $1.23 per share in net cash!).
And the company remains dirt, dirt cheap. Shares have been absolutely rocked in the past two weeks. You have to wonder if this is related to a combination of frustrated sellers (given the net cash balance, it wasn’t unreasonable to think the company should have paid out a special dividend), tax loss selling, and fear over the dividend cut and revenue declines. At today’s close (I’m writing this on Saturday) of ~$1.50, they’re trading for 33% of book value of $4.50 per share and 67% of NCAV of $2.25 per share.
I think there’s more good news here too- I don’t think they’re a fraud. I know that’s a weird thing to say for good news, but a lot of people expressed concern with that in my original write up.
Why don’t I think they’re a fraud?
- A fraud is rarely willing to report results this bad
- I looked through their stable of brands (http://thestephanco.com/our-brands/) and found several on amazon with pretty solid reviews (protein 29 hair gel and Frances Denney perfume).
Still, if you add it all up, I think the shares continue to be attractive. And I continue to be long- as I’ll mention in my annual results post at the end of the week, 2012 has been pretty good to my portfolio, but SPCO has been a huge drag given the huge share price collapse.
But there is still cause for concern. There’s absolutely no doubt that SPCO is trading below liquidation / sale value (assuming they are going to sell themselves at some point). But the fact they had to write off such a huge piece of inventory and pay someone to dispose of it calls into question if the book value is accurate or not. And (as the commentator pointed out), SPCO is probably trying to juice results for a quick sale right now. If this quarter is what the “juiced” results look like, I shudder to see what a normal quarter would be!
But I do I still think there’s a preponderance of evidence saying there’s a huge margin of safety here.
I normally try to add to my position when a stock I invest in drops by 15%+. I’m not doing that w/ SPCO, despite a somewhat bigger than normal initial position in the company and a much bigger drop. So combine my lack of adding with my long position and take that for what you will.
Disclosure: Long SPCO
Bringing you the content on this site involves a significant amount of time and effort. If you like my work, please support my site by shopping at amazon.com! Doing so costs you nothing (the prices are the same as if you went to amazon directly) but results in referral fees for me that I use to support my site.
The content contained in this blog represents only the opinions of its author(s). I may hold long or short positions in securities mentioned in the blog. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author(s).