Monday, April 9, 2018

SLGD Continues to be Cheap

I caught Scott's Liquid Gold (SLGD) a few years after the ugly potential turnaround phase and since I bought in two years ago it has always been cheap but not cheap enough to write about.  So this post will be a bit different from my usual.  Here we have real earnings and real growth.  This is not a company on its deathbed I'm betting will scrape by.

Revenue has been growing at about 20% over the past 5 years while earnings has gone from nothing to $0.38 a share.  The stock is at $3.35 giving a P/E of 8.8, P/S of 1, and P/B of 1.9.  I'm surprised the stock isn't closer to $5.

First let's see some more numbers:
  • total rev: $42.2M in 2017 vs $35.2 in 2016
  • GM: 45.9% vs 43.1%
  • net income: $4.7M vs  $1.9
  • BV: $21.2M vs $16.2
  • shares common: 12.3M vs 12.0
    • no preferred or warrants
  • long term debt: $0.4M vs $1.9
They ran out of NOLs and have been paying about 40% tax.  I'm no expert so don't take this as anything other than a hypothetical, but let's say SLGD pays 25% under the new tax law.  That would turn $0.38 into $0.46 and drop our PE to 7.3.

Cutting to the chase, I think this $3.35 stock is at least 50% undervalued.  As long as the stock continues its slow climb I see no reason to sell.   Maybe if it spiked to $7 on no news.  If all you wanted was a stock pick without the jibber jabber then there you go, no need to read all the fluff.

The question I always ask myself is, "why is this stock cheap?" and in this case a few reasons come to mind.  It trades OTC.  They never put out press releases or hold conference calls.  The stock is illiquid (not compared to my portfolio but to the general public...).  The company is not in an exciting sector.  There's heavy customer concentration and short term distribution deals.

SLGD came into existence in 1954.  They've been selling their flagship product, Scott's Liquid Gold wood treatment, since forever.  In the early 90's SLGD introduced their Alpha Hydro skin care products which quickly became the main source of revenue.  The company operates with two segments: household goods and hair and skin products.

Before discussing present day SLGD further let's get into our wayback machine and talk about my favorite thing: a tiny company clinging to life.  Given enough time every company falls on hard times and the question is will they make it through.

We are back in 2011 
The chart looks horrible and the company has been losing money for years.  Revenue has fallen off a cliff from $50M to stabilize around $15M the past few years.

As revenue fell the company scrambled to stay alive.  They took on debt and tried new products.  They tried other wood care products like wipes.  They tried computer screen cleaners.  They bought up the rights to a mold control treatment.   They tried other skin care products.  They developed a diabetic skin cream line.  Products came and went.   In 2001 they signed a distribution deal with Montagne Jeunesse to be the sole supplier of their skin care sachets in the United States.  In 2009 they signed a similar distribution deal with Batiste dry shampoo.

But it's not working.  The stock sits around $0.30.  Only positive thing the chart shows is a base over the past year.  Would you buy?

This chart says SLGD but it might as well be PEYEHYDIWPCS/DCARMICTGIGA, or any of the other junk/diamond-in-the-rough I always write about.  Doesn't the story sounds the same?  The question is what does the future hold...


Back in the Present Day
Things turned out wonderfully for SLGD.  The stock sulked around for another 1-2 years then took off.


And the price is no fluke.  Revenue has grown like a weed.  In 2013 the company sold and leased back their facilities to keep the lights on and fuel growth.  Batiste and Montagne Jeunesse turned out to be home runs.  Earnings pushed higher.  In June of 2016 SLGD bought the Prell, Denorex, and Zincon lines of shampoo/conditioner.  Debt is almost down to nothing.

As I said earlier, one risk with SLGD is customer concentration.  Walmart accounts for a third of their business while Ulta Salon is a quarter.  The distribution deals with Batiste and Montagne Jeunesse have to be renewed every year or two.  In mid-2017 the Batiste agreement got trimmed to be only the specialty retail channel.  But is hasn't mattered...see for yourself:


Risk, Potential, and the Future: 
This is what it's all about.  Will it keep going up or crash down to nothing?

The risk is concentration and buying into a stock that has risen 10x in the past 7 years.  You have to assess this one yourself.  The company has been concentrated in Walmart and Ulta for many years so why should it stop now?  The Montagne contract has been renewed for coming up on 20 years.  Batiste dropped off and still the company grew.  If SLGD loses any of these it will make a big impact.

The potential is right there in that table and the valuation above.  This growth deserves more than a 7-9 PE.  They are building cash and paying down debt.  The recent 10-k lays out their plans which probably have been the same for decades: 
For 2018, we plan to pursue the following primary goals: (1) continue to increase sales by strengthening and broadening consumer awareness of our products; (2) continue to add additional products to the mix of products that one or more of our existing major customers already buy from us; (3) continue to obtain new distribution of our products at retailers that currently do not buy products from us; and (4) continue to evaluate potential products to be developed, acquired, manufactured and/or distributed by us.
Also mentioned in the most recent 10-k is a China deal.  Maybe it'll be big and maybe it'll be nothing.  All I know is the prior year 10-k didn't mention China at all so this is a change and I love change.
Effective January 1, 2018, we entered into a distribution agreement with HK NFS Limited (“HK NFS”), a Hong Kong limited company, where we appointed HK NFS to act as the exclusive distributor of Alpha ® Skin Care products in the territory of the People’s Republic of China. The distribution agreement is effective for a one-year term and automatically renews for additional successive one-year terms unless and until either party provides notice of nonrenewal at least 90 days before the end of the then-current term. HK NFS will also undertake commercially reasonable efforts to protect the products covered under the agreement from being counterfeited in the territory.
Mark Goldstein owns 25% and is 61 years old.  He has been an employee since 1978, director since 1983, CEO since 1990, and Chairman of the Board since 2000.  Maybe one of these days he'll hang 'em up and sell the company.

The future is unknown.  From a chart point of view I'd say it's headed to $4 then $5.50 and the big question is which direction it goes from there.  The fundamentals tell me it's worth at least $5.  Let's see what happens.



--Dan 
disclosure: long SLGD

6 comments:

  1. if only i had a chance to buy this at $3.00
    i would put 50% of my portfolio on it

    ReplyDelete
    Replies
    1. i discovered this stock at .60 cents in 2013 and did not pull the trigger it feels bad :(

      Delete
  2. what happened today?

    ReplyDelete
    Replies
    1. SLGD reported a bad quarter. Revenue and earnings way down. Reading the 10Q sounds like some of it may be due to order timing while some is competition. This would be the risk of customer and product concentration, as well as stock illiquidity

      Delete

  3. Reason for sales drop. But Walmart will bring in revenue going forward.

    ////////////////
    The net sales of 7 th Heaven and Batiste Dry Shampoo were $3,297,600 in the first quarter of 2018 compared to $6,235,000 for the same period in 2017, a decrease of $2,937,400 or 47.1%. The decrease in net sales of 7 th Heaven face masque sachets is due primarily to a substantial increase in competitive products. Starting in the second quarter of 2018, Wal-Mart Stores, Inc. is featuring one of our high-performing 7 th Heaven products at checkout locations throughout various stores for up to the next 12 months. The decrease in net sales of Batiste Dry Shampoo is due to: (1) changes in our distribution arrangement with Church & Dwight, which eliminated TJ Maxx from among our authorized specialty retailers in September 2017; and (2) what we believe to be are changes in the timing of purchases by certain of our customers in the first quarter of 2018 compared to the same period in 2017.

    ReplyDelete