I have been closely following the story of Scott’s Liquid Gold (SLGD), which became profitable for the first time in a decade in the middle of 2013. The company manufactures and sells wood polish and air fresheners and they have distribution rights to dry shampoo and other products. What makes the story interesting is that the company has been profitable since Q2 2013 but it is still dirt cheap. The stock still trades slightly above book value. The sale leaseback of the companies facilities in February of 2013, which netted $9.5M, aided the come back. Detractors like to point out that SLGD is losing some of its distribution rights to the quickly growing dry shampoo business. Still further is the sordid battle between the company and activist investor Tim Stabosz. I plan on waiting a little longer before deciding whether to invest, but I will be waiting anxiously. Investing in a turn around story generally ends in one of two ways, big win or big loss. Getting in is a difficult thing to time. I recommend caution.
The Pros of SGLD
The Company’s valuation is attractive and its balance sheet is clean. SLGD has a P/E ratio of 6.8x TTM and trades slightly below 4.0x EV/EBITDA TTM. The company has no debt and $4.4M in cash. Its business segments have been improving top and bottom line. The market cap is ~$10.7M and TBV is ~$8.6M.
After freeing up cash from the sale leaseback the company was able to make some improvements. It paid down all debt and put a bigger emphasis on its products and marketing. In Q4 2013 the company introduced it’s Floor Restore product. The company also hired a new head of marketing, who has an impressive background at other major CPG companies. These moves helped to revitalize the legacy Liquid Gold brand, which saw sales decline from nearly $10 million in 1998 to under $5 million in 2012. Household products are manufactured in house and make up only 27% of sales and grew by ~18% in the last twelve months. The business operates at a loss, but margins are improving as sales grow. A complicating factor is that overhead is allocated 50-50 over both segments, which I doubt is a fair split. Household goods had a $600K operating loss. If sales improve this business could turn quickly as margins are high, ~47% and growing, by ~5% in the last 12 months.
Skin and hair care makes up 73% of the companies revenues. The company has two owned brands Alpha Hydrox and Neoteric Diabetic. Alpha Hydrox is the larger brand with products that include face creams, body lotions, and foot creams. Like its name implies Noeteric Diabetic’s skin products are made for diabetics. Like the rest of the business these brands struggled over the past decade, but are now a main target for the company to revitalize. These products suffered mainly due to neglect and a lack of new products.
SLGD distributes Montagne Jeunesse face masques, and Batiste dry shampoo. The Company recently renewed its contract with Montagne Jeunesse through September 15, 2017. The one stipulation is that SLGD brings in at least $4.5 million in face mask sales annually, which seems doable because they are currently doing more sales than that and the business is growing. The companies distribution rights to the dry shampoo lapsed at the end of 2014 but a new deal was recently made. This is where the future becomes a question mark. SLGD retained the right to distribute Batiste to specialty retailers but lost the right to mass retailers. The deal lasts through 2016. The impact of this new deal will be what makes or breaks the company. The company does not break out sales which further clouds the picture. We do know that the dry shampoo market in the U.S. is growing, it is a relatively new product here and sales growth is up between 50-100% in the TTM. Some believe that the company can be profitable under these new terms but I think it is hard to know.
The Cons: All That Shimmers Isn’t Gold, Says Tim Stabosz
Company management is suspect, the impact of losing part of the dry shampoo business could be worse than expected, and the company could lose further product distribution rights in years to come. If SLGD can not turn a profit you can expect for management to just let the company bleed out. Activist investor Tim Stabosz has been vocal in critiquing the company’s management, which may have scared some investors away. I agree that management has not acted in the shareholders best interests.
Stabosz wanted the CEO, who is also majority shareholder ~26%, fired and the businesses sold. He accused the board of being spineless yes men. At one point he even offered to buy out all of the boards shares at $.50 or let them have his shares for the same price. I can understand his frustration. The company could have been sold at an attractive price before Stabosz got involved. The CEO turned the offer down. He then proceeded to drive the company into the ground, with only one year of profitability over the next 14 years. The whole time he was earning ~$500K in salary. Would he have been fired if he did not own the lion share and have the board in his pocket? Absolutely!! Stabosz has since sold his entire stake. His involvement has been pretty entertaining. My favorite quote from Stabosz is below.
- Mr. Goldstein lives in a bubble, thriving on the high regard in which he is held by his employees and the community-at-large, and is operating the company primarily for the sake of “image” and “pride,” as a de facto not-for-profit institution, for which he is awarded a generous “sinecure.”
Read Some of Stabosz’s letters in filings on the SEC’s EDGAR website at the following two links:
My other concern is that SLGD will lose all distribution rights to dry shampoo. The owners Church and Dwight are handling the mass retailers now because that is easier logistically. It would definitely make sense that they are slowly taking control of their entire business. I have seen other examples of this happening in the space before.
There could be big opportunity here because the stock is so cheap, but I am going to wait. My projections of dry shampoo’s impact on net income has a wide range. It might be profitable and it might not. I do not think the company’s break-up value means anything because management will let it bleed money forever.
In a turn around or a company that just turns profitable a lot of the pop in the stock comes after the second quarter of profitability. In this case another big milestone is Q1 2015 when we see how the business reacts to losing the distribution rights. Stay tuned.
Warning: Like many of the other stocks that I write about on here this stock is illiquid.
In related news Horizon Lines, HRZL, had its first profitable quarter in a long time. It made ~$10M last quarter in net income, which is not bad for a $27M market cap company. Yes, I said only $27M market cap. Beware there is a lot of hair on this one, namely debt, lots of debt. In addition, TSRI is finally making a comeback after the recession, this one is not as messy.