Concord Camera (LENS): Still Room to Fly

I wrote about LENS two weeks ago in a post briefly discussing my basic thesis on the stock. To briefly sum up the general idea, LENS, despite the terrible economics of its core business (single-use cameras), LENS is sitting on a boatload of cash and saleable assets while trading for just a fraction of its tangible net worth. Today, I would like to more fully discuss catalysts behind the stock’s recent run-up, and potential future catalysts for reaching what I believe to be an intrinsic value still plenty higher than the current share price.

The stock has nearly doubled in the past two months, largely thanks to 1) a reduced quarterly cash burn and increased earnings thanks to heavy cost cutting measures and 2) extraordinarily heavy insider buying by the company’s CEO, Ira Lampert (which has constituted a tremendous chunk of volume in the last two weeks). Lampert has accumulated an additional 4.24% of the company since mid-November at prices between $3 and $4.60 per share, bringing his total ownership around 8.4%. The transactions have been largely open market, with one recent 75,000 share purchase via exercisable options.

In any case, it’s clear to me that Lampert is either a) very bullish about the prospects of profitability going forward (I’m not), b) accumulating as many shares as possible at low prices before planning to commence some sort of buyout or larger tender offer, or c) crazy. A few would argue c), more would hope for b), and I speculate that it’s a), due somewhat to my tendency to be pessimistic and cynical. Which presents a problem, of course, since I don’t think the company will reach sustainable long-term profitability anytime soon, and, possibly ever (yes, I said it).

Despite having a large chunk of the single-use camera market, the market is shrinking quickly and will likely not exist ten years down the road. Disposable cameras are dinosaurs in the “image capture market,” analogous to the horse and buggy during the early parts of the 20th century. So don’t hope for miracles in this department.

The company is aware of this, and is attempting to enter other markets via the manufacture and marketing of, for instance, personal security equipment (check out their OnGuard Kids site). My guess is that they believe their current manufacturing infrastructure can be relatively easily diverted into making new widgets like these watches, while their solid relationship with Walmart can be leveraged to get these things on the shelves. This would mean low entry costs with safe demand, opening up new sources of revenue for the company. But here’s the problem with that as an investor.

Regardless of the optimism that one could easily get caught up in, investing on the basis that entirely new products will drive future growth is inherently entrepreneurial. As an entrepreneur, there’s nothing wrong with that. But as a value investor, there is. So allow me to do two things. First, the entrepreneur in me will evaluate OnGuard Kids as a new or “innovative” product (hint: it’s not), and second, the value investor in me will talk about the [better] reasons for investing.

The Entrepreneur: I just don’t think it’s a very great product. And if you disagree, I don’t think these things would ever sell to more than the overly paranoid soccer mom market. Here’s my take in short. The product is simply a watch with a loud alarm on it to warn others of danger or ward off kidnappers. That’s it. Nothing fancy. The problem with that as an innovation is that, well, it’s not an innovation. Better such watches exist, and new devices with GPS tracking power (which OnGuard does NOT have) have and will continue to hit the market (for instance, check outhere). Furthermore, the market for a second-rate product in a small demographic (overly paranoid soccer mom market) just isn’t that big. And for a second-rate and cheap-looking product, the watch is expensive ($40). As with single-use cameras, don’t count on miracles. If Wal-Mart is dumb enough to stock it, don’t expect much demand from the end-customer.

The Value Investor: The company can manufacture all the new widgets it wants. None of this matters all that much because LENS is, to me, an asset play! The company is conservatively worth around $7.80 per share and likely more, given its stash of cash, reduced cash burn, and “safe” liabliities. An investor should be investing on the basis of the margin of safety and the low probability that management depletes the boatload, and NOT on the promise of entrepreneurial riches (though I do hope the company will prove me wrong). While a successful new venture leading to profitability will send the shares skyrocketing, I wouldn’t count on it with any high degree of certainty. Yes, profitability seems to be on the horizon with the reduced burn. Yes, management at least recognizes that it is selling buggies to Ferrari drivers. And yes, profitability would be especially bountiful with $16.7 million of US and $54 million of foreign (mostly Hong Kong) tax-loss carryforwards expiring in 2010 and 2016. But that is all wishful thinking.

Luckily, the company has a plethora of other catalysts to make the risk/reward ratio quite low. A 50% margin of safety, heavy insider buying, a possible buyout for that matter, very little debt, the exitting of unprofitable business lines, etc. The main risk factor is that management does something stupid with its balance sheet and pursues highly unprofitable lines of business. But given how conscious they have become about costs, this seems unlikely, and I am betting that they maintain at least the present asset base. This would allow the shares to more than double (again).

Soccer moms and Wal-Mart aside, there is an unmistakable “venture-like” element here, but like a good value investor, it’s the stodginess and cash that courts me.