How disappointed I am with this one - we added it over a year ago to Top 20, watched it sail into April and have endured it subsequently. My thesis was that it was a deep value turnaround with new management that was likely to perhaps capture investor attention as the tide rose and they showed some operational improvement.
Stripping out emotion, which is hard to do on investment mistakes, nothing has really changed over the past year except for the pace of improvement lagging - they were never able to have an operating profit (GM-SG&A > 0). In many ways, they fixed a lot of things and learned what else needs to be done, but they continue to operate at only a breakeven on a cashflow basis. The tide rose dramatically - sales boomed for them, especially in the emerging markets. They addressed operational and design issues - more work needs to be done. Sales isn't enough - investors want (and deserve) profits.
There is minimal chance of a deterioration here unless the global economy shifts into recession again. With that said, now investors need to wait to learn about the new CEO (my hope is that the Board sticks with Mike Noelke) and to wait for elusive profitability. As I stated, the key metric I look at is the value of their assets less debt, and it's $23.50 (excluding large NOLs - these guys will never pay tax). We can haircut some of those assets - factories, inventory, maybe receivables, and the stock is very cheap. With that said, it's not a good stock. I haven't committed more capital in Top 20 to the name, and I don't intend to even think about doing so until I learn what they are going to do with the CEO slot. The name is now oversold only somewhat - it could get worse if the institutions decide to just ditch it and move on.
If the company hits it's exit target in 2012 (a long time from now), the stock will be worth $26-31, but I am not sure how to get confident. The math is that they would have an operating profit (and net income essentially since they don't pay tax) of $60mm on 18.5mm shares. Put a 8 PE on the low-end and you have a price of 26 and a 10 on the high end and you have a price of 31.
As far as Top 20, I intend to reconsider my expectations. I had been targeting 1.1X TBV or so to get mid-20s. If they can't productively use their assets, I am going about this the wrong way. It could be that my target should be dropped to 16-18 based on 2.5-3% NI margin and 10 PE.
Lesson learned: As usual, I need to be careful going outside my domain. I am not a big turnaround investor - I do much better latching on to improving trends that aren't fully appreciated.