Value Find: Meade Instruments Corp.
For investors with an iron stomach and a penchant for dumpster-diving, microcap play Meade Instruments Corp. (Nasdaq:MEAD) may be worth a closer look.
The recent announcement by the Irvine, Calif.-based company that it expects to undergo another year of restructuring has resulted in investors dumping the stock in droves. Since trading as high as $1.69 a share back in February, shares of the long-time designer and manufacturer of telescopes and binoculars have plummeted nearly 60%. At Monday's close, Meade fetched just $0.66 a share, which works out to a market capitalization of about $15 million.
This is a far cry from several years ago when Meade shares crossed the $3 level on excitement that two activist investors had joined the struggling company’s board of directors and a new CEO had been installed to lead Meade’s turnaround. Since then, Meade has managed to cut costs, reduce inventory and shed non-core assets, but this has been a slow process beset by manufacturing problems and related supply chain issues. To compound matters, Meade has had to try and engineer this turnaround during a weak retail environment. In April, Meade sold its Weaver and Redfield sports optic brands for $8 million in cash, followed by the sale earlier this month of its Simmons brand for $7 million in cash. With these sales, Meade will focus on its core business of Meade-branded astronomical telescopes and related products.
On June 16, Meade reported its fiscal 2008 results for the year ended Feb. 28, 2008, and provided the disappointing news that it expected to remain unprofitable in fiscal 2009. For the full year, Meade reported revenue of $98.5 million, compared with revenue of $101.5 million a year ago. The company’s gross profit margin declined to 13.6% from 17.2% of sales. This decrease in gross margin was largely due to over $4 million in inventory write-downs. In the fiscal third quarter, Meade relocated its manufacturing facilities to Mexico. Meade expects the benefits of this move to start showing up in its margins during the latter part of this fiscal year.
For fiscal 2008, Meade reported an operating loss of $15.3 million, compared with an operating loss of $17.5 million a year ago. This reported loss includes a variety of non-cash charges. Even with this being the case, it’s clear that Meade is still racking up losses and burning through cash.
Turning to the balance sheet, Meade remains on shaky ground. As of June, following the recent asset sales, Meade says that it has $9 million in cash on hand with no outstanding balance on its credit facility. While this looks good on the surface, Meade also announced along with its earnings report that it’s now in “technical default” under the terms of this credit facility. Meade is working with its lender to amend the facility. Access to what had been a $20 million credit facility is important for Meade as it builds inventory heading into the holiday shopping season.
Last August, Meade completed a private placement of common stock at $2 a share for gross proceeds of $6.1 million. The company’s two largest shareholders, Hummingbird Management, which owns a 15% stake, and Special Situations Funds, which owns a nearly 12% stake, both participated in this financing. The last insider buying in Meade was made by Special Situations Funds in January at the $1.18 to $1.56 level. Hummingbird was part of the activist investor group that in 2006 won several board seats as part of a proxy contest settlement with Meade. The silence from these two large investors in recent months, coupled with Meade’s continued weak operating performance, has understandably led to a snowballing sell-off in this microcap.
Even at recent “walking dead” stock price levels, Meade shares certainly still carry risk and should only be considered for speculative-minded investors. Besides continued operating losses amidst a potentially weakening consumer spending backdrop, other risks include the stock’s weak daily trading volume and the potential for a dilutive financing agreement. On the flipside, a little good news could go a long way for the stock down here. Announcements such as an amended credit facility, new product launches, renewed insider buying and even a sale of the entire company remain possibilities. With its $15-million market cap, Meade trades for just a fraction of the $80 million in annual revenue that its ongoing operations generated last year.
Again, this is a microcap “dumpster dive” play only for contrarians with cast-iron stomachs and a speculative bent. For the rest of us, this volatile stock is best to watch from the sidelines for now.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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