SUMR - Summer Infant

[ItsAValueTrap]

http://glennchan.wordpress.com/2012/11/13/summer-infant-sumr-cigar-butt-situation/

-----------------------

 

Summer Infant is a profitable company that trades at a quarter of book value.

 

Overview

 

Summer Infant became publicly listed when it merged with a SPAC.  Its founder and CEO continues to own a substantial stake in the company (20%+).

 

Summer Infant designs baby products for parents such as video monitors, changing pads, swaddles, etc.  It has continually used stock and cash to acquire other baby product companies.  The idea is for Summer Infant to use its existing relationships with retailers so that it can sell acquired product lines to more customers.

 

Summer Infant may have gotten ahead of itself in its growth as it is currently having a difficult year and not making as much money as it had made in the past.  Management has suspended its guidance and SUMR shares have sold off to the lower end of the $1.24-$7.58 range it has traded in this past year.  At $1.33 it trades at a P/E of 9.50 and a P/B of 0.23 according to Yahoo Finance.  Its return on capital hasn’t been that high historically.  Gurufocus shows a return on assets of 3.3% to 4.0% in 2007-2010 and 1.80% in 2011.  This compares poorly to its cost of capital as Summer Infant has credit facilities with an average interest rate of 3.69%.  Its high level of leverage may not be the greatest idea in the world.

 

Quality of the business

 

According to Summer Infant’s Facebook page (there are unbiased comments under “Recent Posts by Others on Summer Infant”), it has some issues with the reliability of its baby monitors.  On Amazon, Summer Infant does not have the #1/#2 product in video monitors and its products have mediocre (though not terrible) reviews.  Its video monitor is the #4/#5 best seller in its category.  I prefer the #1/#2 companies in a field as they usually end up making almost all the money.

 

Summer Infant has had some issues in the past with its products.  It settled a class action lawsuit because its analog video monitor products would broadcast video that other people could see.  Customers were not happy that they were seeing somebody else’s baby or that other people could see their baby.  In August of this year, it started a voluntary recall of its baby bather (I can’t seem to find a press release for this… another organization has a press release here).  I believe that it is likely that Summer Infant will continue to have occasional product issues in the future.

 

Cigar butt investing

 

My plan is to try to flip Summer Infant shares at a price closer to its book value.  It is not the greatest company in the world but it also isn’t the worst.  It looks very cheap on a P/B basis.  Maybe I will stick around for a double from a quarter of book value to half of book value at which point I would close my position.

 

The stock is trading as if there are fears of bankruptcy.  Summer Infant is still profitable and has decent products… I see the current price as irrational.  I do not see it as ugly as other cigar butts out there (e.g. the Canadian Venture exchange has companies like Jemtec which trade below liquidation value… I avoid those companies due to awful management).

 

Links

 

VIC writeup #2

 

VIC writeup #1

 

*Disclosure:  Long SUMR.  This is not in my circle of competence and is a small position for me.

[Kraven]

I looked at them quickly once.  Weren't they in default on their credit agreement?  I haven't looked recently but at the time they were not in compliance with various financial covenants.

[ItsAValueTrap]

Yes they were.  Their credit facility has been amended.

 

Loan Agreement

The Company announced that it has entered into an amendment to its loan agreement with its banks. The amendment, among other items, reset financial covenants, established additional margin spread pricing tiers, and added a paid in kind (PIK) interest rate of 200 basis points, a portion of which is payable under certain conditions. The amendment also waived any covenant defaults that may have existed at September 30, 2012.

http://sumr.irpage.net/details.php?id=58703

 

For whatever reason, I don't take breaches on financial covenants too seriously.  In the drybulk shipping industry, breaches in covenants were widespread but the lenders did very little about it.  None of the lenders wanted to seize collateral or to recognize losses on their books.

Tesla Motors... another example of covenants not mattering.

People squatting in their own homes after they stopped paying their mortgage... Wells Fargo and almost everybody else in the banking sector let this happen.

 

Summer Infant has a very low interest rate on its credit facility and it doesn't yet look like a killer mountain of debt.  But they have a large amount of debt that is worth paying attention to.

[ItsAValueTrap]

10.  SUBSEQUENT EVENTS

 

On November 7, 2012, the Company entered into an amendment (the “Fourth Amendment”) to its Amended and Restated Credit Agreement with Bank of America and the other lenders signatory thereto (the “Loan Agreement”).  The Amendment amended the Loan Agreement to provide that the applicable interest rate margin for loans under the Loan Agreement for period October 1, 2012 through March 31, 2013 will be at fixed rate of 4.75% for Eurodollar or BBA LIBOR rate loans and L/C fees and 2.75% for base rate loans, thereafter each rate increasing by 1.00% in each fiscal quarter, and that, beginning October 1, 2012, loans under the Loan Agreement will bear additional interest of 2.00% per annum not paid in cash but payable in kind by adding such accrued interest to the outstanding principal of the loans, or “PIK interest.”  PIK interest is due and payable on the earliest of (i) the maturity date of the loans, (ii) the date all loans are paid in full and all loan commitments are terminated, and (iii) the date of acceleration of loans upon an event of default, provided that if all obligations under the Loan Agreement are paid in full and all commitments terminated on or prior to March 31, 2013, the Lender will forgive 50% of the accrued and unpaid PIK interest.

 

Under the Fourth Amendment, the Company is subject to ongoing compliance with certain financial covenants, including that (i) the Company and its subsidiaries maintain and earn on a consolidated basis as of the last day of each fiscal quarter a specified consolidated EBITDA amount (as defined in the Loan Agreement) for the 12-month period ending on the last day of each fiscal quarter beginning September 30, 2012; (ii) the Company and its subsidiaries maintain a certain ratio of consolidated total funded debt to consolidated EBITDA; and (iii) the Company and its subsidiaries maintain a minimum fixed charge ratio.

[tooskinneejs]

Itsavaluetrap said: "At $1.33 it trades at...a P/B of 0.23 according to Yahoo Finance...My plan is to try to flip Summer Infant shares at a price closer to its book value.  It is not the greatest company in the world but it also isn’t the worst.  It looks very cheap on a P/B basis.  Maybe I will stick around for a double from a quarter of book value to half of book value at which point I would close my position."

 

As a result of a write-off of $71 million of goodwill and intangible assets in the third quarter of 2012 (reported on November 13th), you have your wish.  Stockholder's equity dropped from $96.1 million at June 30, 2012 to $31.0 million at September 30, 2012.  Book value per share is $1.71 at September 30, 2012.  So the stock now trades at a P/B of 0.82.

 

 

[ItsAValueTrap]

Yeah I know!

 

Has anybody else looked into this company?

[oddballstocks]

Yes, when we were looking for a baby monitor we looked at their products. A lot of people loved their stuff in the past but it seems they haven't been able to keep up with competition. We ended up going with a Dutch product that's awesome, but it was more expensive.

 

As for the actual company...nope but I have a fear of debt, especially too much debt and with a company that's struggling with it.

 

As for the circle of competence comment, I'm guessing you don't have any kids? I knew all their stuff, and I'm familiar with it from hearing my wife and her friends talk about the products. This is the modern day Lynch Leggs type thing. The mother knowledge on Summer Infant is incredible, it's getting that knowledge into action that's tough.

[ItsAValueTrap]

As for the circle of competence comment, I'm guessing you don't have any kids

No I do not have any kids haha.  I just look at their reviews on Amazon and how they rank on Amazon's best selling lists.

 

But as far as having a circle of competence goes, my current litmus test would be to see if I can answer the following questions:

A- Did this industry have good economics in the past?

B- Will this industry have good economics for shareholders in the future?

C- Who will the winners and losers be in this industry?

[ItsAValueTrap]

From seeking alpha:

Summer Infant Earnings Provides A Buying Opportunity [View article]

I'm in the Infants business. You are applying all those wall street metrics and analyses. The problem is structural in the industry. Its controlled by a handful of retailers, Walmart, Target, and Babies R Us. They have huge power over the vendors and use it to squeeze all of us on price. You can't make margin, so you fall into the trap of working cheaper and cheaper to try to trade off the falling margin against higher volume. Unfortunately, everyone can't do this and survive. Everyone just hopes that the "other guy" will go out of business first and you can pick up their volume. In addition, we have to work with crushing, costly and in most cases, unnecessary government regulations. The retailers will not let us recoup these costs, thus making it worse on the expense side

http://seekingalpha.com/user/3269851/comments/symbol/sumr

 

[Kraven]

For whatever reason, I don't take breaches on financial covenants too seriously.  In the drybulk shipping industry, breaches in covenants were widespread but the lenders did very little about it.  None of the lenders wanted to seize collateral or to recognize losses on their books.

Tesla Motors... another example of covenants not mattering.

People squatting in their own homes after they stopped paying their mortgage... Wells Fargo and almost everybody else in the banking sector let this happen.

 

Summer Infant has a very low interest rate on its credit facility and it doesn't yet look like a killer mountain of debt.  But they have a large amount of debt that is worth paying attention to.

 

Breaches of financial covenants are very bad facts.  Just because the lenders didn't do anything about it doesn't mean that they can't.  The company has just handed the lenders a loaded gun and said to point it at them and use it whenever they want.  The shipping industry can't be compared to a baby products company.  There are going to be issues with foreclosing on ships, including complex legal issues as well as administrative issues, that aren't involved with a simple manufacturing/industrial company.  Obviously the lenders don't want to foreclose on anyone.  They just want to get paid.  But it certainly allows them to renegotiate the loans, get better terms, etc.