Morsa Images/DigitalVision via Getty Images
Morsa Images/DigitalVision via Getty Images
One might think that during a pandemic, buying into a company that provides various protective clothing and accessories could prove to be a good idea. For a time, this might have been the case. Because, as a management team at Lakeland Industries ( NASDAQ:LAKE ) demonstrated, revenue growth was the result of strong demand caused by the crisis. But now that much of the pandemic seems to be winding down, the company is posing for investors some risks that could result in some pain moving forward. Although shares of the company are currently cheap, investors would be wise to tread cautiously because they can become rather expensive rather quickly. I would even go so far as to say that they might constitute a value trap.
Lakeland Industries has positioned itself over the years as a provider of industrial protective clothing and accessories for the industrial and public protective clothing markets. Through its global network of over 1,600 safety and industrial supply distributors, the company sells its offerings to various end users such as integrated oil, chemical and petrochemical companies, automobile manufacturers, construction firms, clean room, janitorial, and pharmaceutical companies, and much more. The company also supplies federal, state, and local government agencies and departments. These include fire and law enforcement, the Department of Defense, the USDA, and the Department of Homeland Security.
Its line of products include limited use and disposable protective garments such as coveralls, laboratory coats, shirts, pants, hoods, aprons, sleeves, armed guards, and more. These can, but don't have to, be coated or laminated in order to increase splash protection against harmful acids, bases, and other chemicals. Over the years, the company has also created its own portfolio of fabrics under brand names such as Safegard, CleanMax, and MicroMax. On top of all of this, the company sells heavy-duty chemical protective suits and protective apparel. These come in special handy when dealing with infectious diseases. The company’s firefighting and heat protective apparel is also an important product line for it. Not to mention its durable woven garments, high visibility clothing, and gloves and sleeves that are made of Kevlar.
Author - SEC EDGAR Data
Author - SEC EDGAR Data
Over the past few years, the financial picture achieved by Lakeland Industries was rather impressive. Sales rose from $99 million in 2019 to $107.8 million in 2020. But then, in 2021, revenue spiked to $159 million. It is worth noting that this 2021 fiscal year reference is to the beginning of 2021, since that is when the company's fiscal year ends. So really, much of the sales that took place then were generated in 2020. But herein lies the problem. In its 2021 fiscal year financials, management said that the reduction in demand caused by the COVID-19 pandemic winding down, particularly as the vaccine became more widely adopted, would have a negative impact on the business as a whole. At that time, it estimated that about 35% of its overall revenue was associated with COVID-19 demand. That has, unfortunately, come to pass. In the first nine months of its 2022 fiscal year, the company reported sales of just $91.6 million. That compares to the $122.1 million generated the same time one year earlier.
The bottom line for the business has followed the top line rather markedly. Net income increased from $1.5 million in 2019 to $35.1 million in 2021. Operating cash flow increased from $1.8 million to $40.7 million. And EBITDA jumped from $5.3 million to $47.5 million. Just as in the case of revenue for the 2022 fiscal year, financial performance on the bottom line has suffered as revenue has fallen. Net profits of $10 million in the first nine months of its 2022 fiscal year were far lower than the $27.2 million generated one year earlier. Operating cash flow, meanwhile, dropped from $28 million to $12.6 million. And EBITDA shrank from $37.3 million to $16.8 million.
Author - SEC EDGAR Data
Author - SEC EDGAR Data
This kind of decline following a temporary increase in demand makes it very difficult to price the company. For instance, if we use the data from 2021, the business would be trading at rather low multiples. And by low, I mean a price to earnings multiple of 4.7, a price to operating cash flow multiple of 4, and an EV to EBITDA multiple of just 2.3. The latter of these metrics is so low because the company has no debt but has $55.53 million in cash on hand while having a market capitalization of just $164.41 million as of this writing. This makes the company look deceptively cheap. But if, instead, we assume an eventual reversion back to levels seen in 2020, things don't look so great. That would result in the price to earnings multiple of the company surging to 49.8 while the price to operating cash flow multiple would come in at 45.7. The only multiple that makes the company look affordable is the EV to EBITDA multiple, which comes in at 15.3. Now, if we instead compare cash flow to the enterprise value of the business, the price-to-earnings multiple would come in slightly lower at 33, while the price to operating cash flow multiple would be 30.2.
Author - SEC EDGAR Data
Author - SEC EDGAR Data
To put the valuation of the company into perspective, I decided to compare it to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 8 to a high of 24.1. On a price to operating cash flow basis, the range was 7.1 to 11.2. And on an EV to EBITDA basis, the range was 5.2 to 14.6. Even if we use the enterprise value of the company instead of its market capitalization for the pricing across the board, Lakeland Industries is still the most expensive of the group.
Based on the data provided, I do believe that Lakeland Industries is an interesting company. But, quite frankly, it is, at best, fairly valued. More likely than not, it is a value trap in the sense that the decline in profitability moving forward should push the trading multiples up significantly and the share price down some. Because of this, I do believe that investors would be wise to tread cautiously should they decide to take part in this opportunity.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.