Founded in 1982, Lakeland Industries is an international protective clothing provider. Its products include disposable and reusable protective suits for chemical work, firefighting and heat. They also produce reflective safety gear, clothing and gloves. Sold in over 40 countries, Lakeland’s customers include oil exploration plants, car manufacturers, chemical plants and medical labs.
Free From DuPont
Historically, the majority of Lakeland’s revenues were tied to a licensing deal with DuPont. Investors grew wary when that agreement was terminated in 2011, overlooking Lakeland’s growing international presence. Over the past 10 years, the company has worked to expand its product base considerably, producing a greater number of higher margin, branded materials that differentiate it from its competitors. Lakeland now offers over 800 products, versus just 100 before. Its geographic and manufacturing presence is now global. Its customer breadth is more diversified, and its raw material sourcing is more efficient. While DuPont-related business has fallen from nearly 80% of sales to 0%, Lakeland’s other sales have grown over 13% annually and gross margins have expanded from 24% to 38%.
Lakeland’s products are always crucial, but never more so than in times of crisis. In the course of a normal year, the company’s products are important for many occasions in numerous industries, including waste clean-up in the oil industry and fire protection in public safety. But from time to time, a global health crisis will occur, driving a one-time spike in both demand and the stock price. For example, during recent Ebola and bird flu outbreaks, Lakeland’s specialized protection suits were in particularly high demand. Revenues grew nearly $9 million from those events alone. Even more importantly, the stock price temporarily appreciated, providing some long-term investors an opportunity to harvest gains during a time of market uncertainty.
CEO Chris Ryan’s extensive experience and significant stock ownership align his interests with those of long-term investors. He has been with the company for over 32 years, successfully navigating through several challenging economic environments and strategically rebuilding the company for a future without DuPont. Today, he collects a relatively modest salary but owns over 5% of the company. As a result, his decision-making is focused on increasing shareholder value. Rather than making expensive acquisitions, the company’s excess cash is invested internally, allowing Lakeland to invest in competitive innovation, operational efficiencies and global expansion.
A Long-Term Perspective
Lakeland’s stock price reflects a quintessential example of investors missing the forest for the trees. Taking a superficial glance at the last decade, Lakeland’s growth has been weakened by its transition away from DuPont. However, a more encompassing perspective reveals a rare example of an under-appreciated niche leader that should continue to take market share and expand margins even absent another global health crisis. As of June 30, 2018, shares traded at $14.15, a significant discount to our estimate of intrinsic value.
Based in Houston, Team is the leading provider of construction, maintenance and repair services for high-temperature and high-pressure piping systems. Team was founded in 1973 as an on-stream leak repairs and hot tapping company. Hot tapping allows the installation of new branch pipe onto the existing pipeline without interrupting operations. Rather than large, one-time construction projects, the company relies on numerous small, mainly recurring task orders that relate to process piping construction, maintenance and repair. Team management estimates that two-thirds of its revenue is maintenance-related and the remainder is tied to construction and expansion work. Team has a global footprint with more than 7,000 employees in over 220 locations across 20 countries.
Many Businesses, One Team
Over the past decade, under the previous management team, Team acquired multiple competitors to broaden its service offering. Although the acquisitions were sound strategic moves, the businesses were not integrated into one coordinated product offering. As a result, the combined businesses had duplicate costs and locations. The current management team has initiated a transformation project titled OneTEAM which aims to better integrate these businesses, improving cross selling opportunities and eliminating unnecessary costs. Once the upfront costs are in the rearview mirror, longer term benefits should be significant.
North America’s growing oil and gas business is creating exciting opportunities for Team. Some industry players continue to defer maintenance to meet the short-term needs of their businesses, a strategy which traditionally leads to more expensive and complex fixes down the road, meaning more business for TEAM. Additionally, growing infrastructure needs for North American onshore drilling could lead to new project business the company has not experienced in years. Overall,Team’s robust customer base is keeping its services in strong demand now and likely for years to come.
In January 2018, Team announced the appointment of Amerino Gatti as Chief Executive Officer, replacing interim CEO Gary Yesavage. Amerino brings a wealth of industry knowledge to the company after working for more than 25 years at Schlumberger, where he oversaw 20,000 employees across 85 countries. We believe his industry experience coupled with the OneTEAM transformation project will put the company on the path to success.
Team stock was under pressure throughout 2017 as the company issued convertible debt securities and struggled to meet market expectations. Throughout the first half of 2018, the stock has rallied as investors gain more comfort with management’s business plan to improve growth in the company’s end markets. We believe Team’s management has put the business on the right track for longer term success. As of June 30, 2018, shares traded at $23.10 a 16% discount to our steadily growing private market value of $27.64.
TEGNA is one of the most geographically diverse television broadcasters in the United States. TEGNA’s portfolio includes 47 television stations in 39 markets. The company is the largest owner of “top four” affiliates in the top 25 markets, including the largest NBC affiliate group, reaching nearly one-third of all television households.
Warren Buffett attributes his success to staying within his circle of competence—doing one thing (investing) and doing it well. Tegna is a pure-play first-rate broadcast television provider, having spun off its newspaper business—Gannett Co., and its digital automotive marketplace business—Cars.com. It also sold the majority of its controlling stake in its job search website—CareerBuilder. We value TEGNA’s culture, brand awareness and the important role local television plays within its communities. Although broadcast television faces long-term issues, when it comes to reaching the largest audiences, network television remains the most effective medium with mass reach and the ability to build a brand campaign for advertisers.
Growing Subscription Fees
Audience fragmentation and evolving technology continue to disrupt the traditional media business model as an increasing amount of video is now offered through subscription video-on-demand services including Netflix, Amazon Channels and Hulu, virtual multichannel video programming distributors (vMVPDs) including Dish’s Sling TV, AT&T’s DirecTV Now, Google’s YouTube TV, and media networks’ own direct to consumer services. Subscription cancellations and cable TV holdouts continue to negatively impact the nation’s largest pay-TV subscribers. However, the increasing popularity of vMVPD platforms (Internet-delivered devices) has offset the loss of pay-TV subscribers. Importantly, local TV stations are found on many skinny bundles and online subscriptions with per subscriber economics that rival traditional MVPDs. Subscriptions represented 41% of TEGNA’s revenues in the first quarter of 2018, compared to just 15% three years ago. They may approach 50% of TEGNA’s revenues in five years.
Benefitting from Politics
With the primaries this summer and the midterm elections in November, we expect TEGNA to have a strong year as its stations serve voters in nearly 50% of the gubernatorial elections and approximately 40% of the senate races. In addition, we expect TEGNA to benefit from industry consolidation—whether through acquisitions, mergers or TV station swaps, as the FCC seeks to eliminate several outdated media rules.
In 2017, CEO Gracia Martore retired after 32 years. Martore was one of the most disciplined and independent thinkers we have ever worked with at Ariel. Although we were sorry to see her retire, the board elected a knowledgeable and respected leader in David Lougee, president of TEGNA Media for the past 10 years.
Significantly Undervalued Franchise
Evidenced by the Company’s $300 million three-year share repurchase program, management is confident in the long-term outlook. We believe that TEGNA is a bargain on nearly all valuation measures. Currently at $10.85, the stock is trading at a 51% discount to our estimate of its private market value and has a forward twelve month cash earnings per share multiple of 5.8x.
Investing in small cap and mid cap stocks is more risky and more volatile than investing in large cap stocks. The intrinsic value of the stocks in which the Funds invest may never be recognized by the broader market.
On this page, we candidly discuss three individual companies to illustrate our investment process. These companies are current holdings of certain Funds, one of which was a top performer for the quarter, one was a new addition to a Fund, and the other was, in our view, undervalued by the market. The information and our opinions were current as of June 30, 2018, but are subject to change. The information shown does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. These securities do not represent all securities purchased, sold, or recommended to investors during the period. Investors that were not invested in a Fund that held each stock for the entire holding period shown will not have experienced the performance shown. Past performance does not guarantee future results. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of any Fund or of any particular Fund itself. Portfolio holdings are subject to change. Click here for the top holdings of the Funds.