Saturday, June 10, 2006

Looking Through the LENS:
Another Cheapie? Or Just a Cigar Butt?

Company: Concord Camera
Ticker: LENS
Price: $.66
Avg Volume: 80000
Market Cap: $18.9 million
NCAV: $44.6 million
Mkt Cap/NCAV: 2.36
Enterprise Value: -$9.0 million

I admit it, at first glance, there really is not much to like about this company. Judging by its current price, and fact that its enterprise value is negative, most investors hate it too. Concord Camera has had it’s share of problems over the past several years, including lawsuits for patent infringement, as well as suits brought by shareholders.

A Terrible Business
Florida based Concord is in the disposable (single use), 35mm, and digital camera business. That’s not a great place to be, given the intense competitive environment, and competition that includes some big names such as Canon, Fuji, Hewlett-Packard, Kodak, Olympus, Nikon, Sony, Pentax, Konica/Minolta, Panasonic, Samsung and Vivitar. Manufacturing and assembly of Concord products is done in China, and products are sold worldwide. The company ceased manufacturing digital cameras in the fourth quarter of 2005, and now purchases these from outside manufacturers. Company products include the following brand names: Concord, Keystone, EasyShot, Le Clic, Fun Shooter, Polaroid, and Jenoptik

Dependent on Contracts and Retailers
This micro-micro cap company is highly dependent on a few retailers, namely Wal Mart, and Walgreen which represented 22.6% and 11.7% of 2005 sales. Dependence on one or two retailers is not always a good thing, especially for a tiny struggling company that has very little pricing power (at least thats what we suspect). Wal Mart could take its business elsewhere pretty easily, a move that would devastate this company.

Terrible Results
Concord continues to lose money quarter after quarter, and sales continue to fall. The company has not turned a profit since 2003. FY 2005 sales were $174.3 million, down 14% from 2004s $203.1 million. 2005's net loss ballooned to $44.9 million from $31.2 million in 2004.

Whats to Like
If you are ready to short LENS at this point, we certainly wouldn't blame based on the companies seemingly dismal situation. But, hold on. There is something to like about this company afterall. Despite mounting losses, a tough operating environment,
LENS is awash with cash, on a relative basis, anyway. Amd the company is currently trading well below net current asset value.

The Balance Sheet
As of 4/01/06, the company had $29.5 million in cash and short term investments. (There's an additional $8.2 million in restricted cash, but we'll leave that out). That equates to $1.00 per share in cash. Furthermore, the company is trading well below its NCAV: Here's the calculation:

Current Assets: $79 million
Current Liabilities: $32.6
Long Term Liabilities: $1.7
NCAV: $44.6 million
Mkt Cap: $18.9 million

In Ben Graham's terms, this is a true net/net, because it trades for less than 2/3 of NCAV. (That certainly does not mean that Graham would like this company!)

Negative Enterprise Value
One other intersting fact is that LENS' Enterprise Value(EV) is negative. For anyone new to the concept of EV, it is a more meaningful measure of market valuation than market cap. EV represents the entire value the market (or acquirer) places on a company. It represents all claims common and preferred shareholders, and bondholders have on a given company. It is calculated by adding market cap, prefered equity, and debt, then subtracting cash & short term marketable securities.
A negative EV sends a strong signal: The market has little or no hope, and would rather give it away for nothing. (This is theoretical of course)

Here the EV calculation for LENS:
Market Cap: $18.9
Debt: $ 1.6
Preferred: 0
Cash & ST MS: $29.5

EV: ($ 9.0)

What this tells you, is all else being equal, buyers of LENS are being paid to purchase shares. In reality, its not quite that simple, but you get the point.

Institutional Ownership
Surprisingly, there is a decent amount of institutional ownership, just over 24%.
Here's the top 5:
Dimensional Fund Advisers: 6%
Howson Tatersall: 3.3%
SC Fundamental LLC: 2.7%
HSBC 1.8%
UBS O'Connor 1.4%

This one is not for the feint of heart. There are a whole lot of negatives that might ultimately sink this tiny ship. However, if the company can keep it's cash burn rate low (was about $4 million last quarter, that includes changes in cash and S/T MS), and find a way back to profitability, this may be an interesting story. The company has very little debt ($1.5 million ST, no long term), so interest payments are not a huge weight. Furthermore, there were some encouraging signs in Q3; while the company still had a sizable loss ($4.7 million), that is down sharply from the same quarter last year ($14.8 million). So, maybe we are reaching a bit, but we are just looking for a pulse. A deep value investor might look at this company and say that for $.67 per share, they are getting in return $1.00 in cash and ST MS, plus $.50+ in tangible assets (LT assets, PP&E). We know theres more to the story. We know that a patent infringement case might get in the way, or a canceled contract might send sales further. Still, we'll be watching, trying to see if there's any life left.

Please do your own due diligence with this company; read the 10K or recent 10Q's, and as always proceed with caution. And remember, the principles of diversification apply to net/nets too.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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