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Long-time Wish List holding, Lakeland Industries, is catching attention today because the company is actively participating in the clean-up efforts in the Gulf of Mexico. Without mentioning any numbers, Lakeland President and CEO, Christopher Ryan, stated last week that, “we have increased production of these types of [garment] products at our facilities around the world to meet the substantial increase in demand from BP and many other customers.” With the gulf oil crisis (CNN coverage) potentially adding further life to Lakeland’s surging stock price, is now the time to consider selling?
An Unprotected Affair
When we purchased LAKE in December 2006 the company was running a nearly perfect decade+ streak of 11+% ROE (2001 being the exception), and the company’s tangible book value had not registered a annual decline since 1994. Despite this impressive record our timing when selecting LAKE could not have been worse: ROE has been below 11% in each of the last 4 fiscal years, and the company’s tangible book has been negatively impacted by these weaker returns and from acquisitions.
The main problem since being selected is that domestic (U.S.) returns have been punished severely by a more competitive marketplace, a slow down in the economy, and the reduction in key government sales. As for LAKE’s foreign expansion efforts, this story has been very impressive in many areas, except margins. One final negative note is that emergency sales like those derived following 9/11 have failed to materialize (i.e. scares like the swine flu have not had a lasting positive impact).
As these negatives have taken root many investors have jumped ship and LAKE’s stock price had slid considerably below tangible book value. Quite frankly, illiquidity and lack of hedging options available on the stock have made holding LAKE an unprotected saga – an enterprise that is viable over the long-term may be worth more than its break-up value, but perhaps not if the expected returns of a company are no better than the safety that can be acquired in bonds.
Considering The Options
Even as Lakeland’s stock price has performed poorly we have stuck to the idea that the company is well managed and attractively priced. And while we still believe these tenets to be true today, it must be acknowledged that, emergency sales aside, the company is heavily dependent upon economic activity in the U.S. economy. Not being bullish on the long-term prospects for the U.S. economy it is difficult to become wildly bullish on the prospect of holding Lakeland forever.
In short, there is the distinct possibility that the gulf oil crisis will push LAKE shares up to an attractive sell area. This area is not reflected in yesterday’s closing price of $11.20/share (which is only slightly below tangible book), but could come into focus should shares continue to move higher. We continue to analyze our position in LAKE, keeping two questions in mind:
- Hold?
- Sell for a loss?
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