Earnings season is in full swing with the focus as usual on the megacap household names. While the market was reacting yesterday to Q1 numbers from the likes of Procter & Gamble (NYSE: PG), Pepsico (NYSE: PEP), Amgen (NASDAQ: AMGN) and Boeing (NYSE: BA), we were also looking at the other end of the spectrum for interesting small cap stories.
One company that has caught our attention in recent months is Lakeland Industries (NASDAQ: LAKE), which manufactures and sells a comprehensive line of safety garments and accessories for the industrial protective clothing market. The company has completed an impressive turnaround over the past several years – emerging cleanly from its long-term dependence on DuPont (NYSE: DD) as its primary customer – and is focused on emerging international markets as the major growth opportunity for the foreseeable future.
Lakeland reported fiscal 2017 Q4 and full year results for the year ended January 31, 2017, yesterday after the close. On a 1% reduction in revenue from the prior year period, the company increased gross profit by 29% in fiscal Q4 while decreasing operating expenses by 6%. The company also showed higher cash flow and lower debt. A replay of the earnings conference will be available through May 3, 2017, by dialing 877-344-7529 (Domestic), 412-317-0088 (International) or 855-669-9658 (Canada). Use pass code 10105453.
Lakeland may not be quite a household name yet, but its products are well known in the industrial safety community. The company’s gear is sold by a direct sales force and by independent sales reps to a network of over 1,000 safety and mill supply distributors. These distributors in turn supply end user industrial customers such as chemical, petrochemical, auto, steel, glass, construction, smelting, janitorial, pharmaceutical and high tech electronics manufacturers, as well as hospitals and laboratories. In addition, Lakeland supplies federal, state, and local government agencies, fire and police departments, airport crash rescue units, the Department of Defense, the Centers for Disease Control and Prevention, and many other federal and state agencies.
The company lives outside our typical “high risk” basket, but we find Lakeland’s turnaround and profit trajectory compelling and difficult to ignore. The weaning from DuPont dependence was particularly striking as the company made up for that lost revenue by growing new business both in the US and internationally (see revenue chart below). Toward the tail end of the DuPont transition, Lakeland also suffered a major defeat in a Brazilian court case that led to an exit from that country. The company successfully replaced $95 million in revenue during this span, and it appears that management has positioned the company well for long term revenue and profit growth.
Lakeland has demonstrated a clear ability to grow profits from its continuing operations:
The company’s products address over half of the $23 billion addressable market for personal protective equipment:
Source: Lakeland Industries Corporate Presentation, March 2017
The company is concentrating on regions with high growth potential, including Asia and Latin America, while continuing to chip away at market share from the likes of DuPont and Honeywell (NYSE: HON). Lakeland has shown an ability to perform well in emergencies, such as during the ebola and avian fly crises. The company’s small size was an asset, enabling rapid, agile response to the crises and winning new contracts in the process. Emergencies such as these pandemics, oil and chemical spills and natural disasters have unpredictable timing, of course, but they do occur frequently, representing “bonus” revenue opportunities for Lakeland.
We note that this stock trades very thinly, averaging only 20,000 shares per day. It’s drifted up 6% in the past 2 weeks ahead of earnings on even lighter than average volume, and you know that thin traders like this one can move like a dart in either direction with little provocation. We like the growth story, the focus on emerging markets, management’s discipline in transforming the company from merely a DuPont feeder and the disposable (i.e., customers must buy replacements) nature of many of its products. We think the fiscal Q4 2017 numbers show a business that is focused on geographic expansion while having a handle on costs, and we look forward to seeing continued progress on those fronts throughout fiscal 2018, leading to greater interest and increased liquidity in the stock.
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