The Daily Workshop Report
by Randy Befumo (TMF Templr)

ALEXANDRIA, VA (Sept. 16, 1997) -- Yesterday I started discussing one of the four main screens I use to generate new investment ideas and promised that I would explain today how I would begin to evaluate an idea that popped out of the screen oven. Our screen of choice is the Rising Margins screen, which shows us companies whose sales are rising 15% or greater and whose earnings are increasing faster because the companies are increasing their margins. For the week of the 12th, the Rising Margins screen generated 18 investment possibilities, four of which we set aside in yesterday's report.

Looking at the list in terms of earnings per share growth, we have decided to put ART'S-WAY MANUFACTURING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARTW)") else Response.Write("(Nasdaq: ARTW)") end if %> and FAIRCHILD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FA)") else Response.Write("(NYSE: FA)") end if %> aside because they are both involved in a cyclical industries where it would take a lot of work to figure out what is going on. This leaves LAKELAND INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LAKE)") else Response.Write("(Nasdaq: LAKE)") end if %> as the company with the highest earnings per share growth at 157% year over year on a revenue increase of only 18%. Certainly this is not the 2900% or 1600% gain of Art's-Way or Fairchild, but it ain't too shabby.

Remembering yesterday's examination of ATEC GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATEC)") else Response.Write("(Nasdaq: ATEC)") end if %>, the first thing I want to check is the share price. Sure, it might seem superficial, but the investment quality of companies with share prices of $4 or $5 or greater is much higher than that of penny stocks, regardless of what penny stock promoters might say. Since institutions are locked out of sub-$5 companies, sub-$5 companies are not marginable, and sub-$5 companies rarely get there without some kind of major mishaps, this move simply eliminates companies that are less likely to be the high-quality kind of business a Fool wants to own. Lakeland looks okay at $8 1/4.

My next question is what does the company do? The screen says the Investor's Business Daily industry is "Commercial Services-Security & Safety." The press release says that Lakeland is a "leading manufacturer and distributor of disposable and reusable protective work clothing." The company's clothing is used by those who handle hazardous material as part of their job. With increasingly stringent environmental standards, continued asbestos abatement, and government-sponsored environmental cleanup in the 1990s, at first blush this doesn't seem like a bad business to be in.

The next thing I want to know is whether or not this quarter is unique or if the company has been showing solid growth for a while. A quick trip to MarketGuide and Wall Street Research Network (WSRN) give me two sources of historical revenue and earnings data to view. The reason I want to look at two sources is because sometimes there will be discrepancies depending on how information providers handle an accounting issue that might alert me to a problem. From the WSRN page, you can see that earnings become strongly positive in 1995, the company choked in 1996, and there has been a recovery since then. The Market Guide shows a steady progression in earnings and sales over the last few quarters, another indicator that this quarter is not an aberration. Before I put time into researching a company further, I want to be dead sure that the earnings are not a fluke.

Although this might seem superficial, I want to check out an historical price chart on the company to see what has been happening. Over the past year, shares have more than doubled from around $3. Over the past three years, trading as been pretty choppy -- no surprise given the 1996 disappointment after a strong 1995. From this historical chart, I know that I will need to find out what happened in 1995 and 1996 to to cause such drastic fluctuations in the stock price. This is especially important because in publicly companies, as George Santayana said, history tends to repeat itself -- particularly disappointing history.

To find out the history I would need an investment packet, which I don't have. Again, I want to know that I am not wasting my time, so I need to do a couple other preliminary checks. The first is to assess what kind of valuation the shares are carrying after their recent double. With 2.62 million shares outstanding according to the press release, at $8 1/4 the company has a market capitalization of $21.62 million. Sales were $45.1 million over the past twelve months and the company earned $0.54 EPS, a level equal to the brilliant 1995 it pulled off before tanking. This puts the company at 0.48 times sales and 15.3 times earnings.

Unfortunately, the company does not publish its balance sheet in its quarterly earnings press release. To get this, we have to go back to last quarter (using the 10-Q available one of the several Edgar-related websites), when the company had $316,000 in cash and $6.0 million in long-term debt. The debt situation, although manageable, changes the perceived valuation a little bit as it puts the company's enterprise value at $27.30 million. Enterprise value, which is market capitalization plus debt less cash, is a much better approximation of the current market value of a company. With debt-to-market capitalization of 27.7% and a debt-to-equity ratio of 58.2%, the company appears to be highly leveraged. However, with the debt-to-equity at 73.6% only three quarters ago and probably lower in this last quarter, it is certainly going in the right direction. Although there is probably some additional risk here, the enterprise value-to-sales ratio of 0.60 and the enterprise value-to-earnings ratio of 19.3 don't seem out of whack. With sales growing at 12% or better over the past four quarters, the P/E multiple of 15.3 could be reasonable.

The final question I would want answered before I would officially add the company to my "To Research" list is to get a sense of the underlying quality of the business. With operating margins of 7.3% over the past six months, an increase from 5.9% over the same period last year, quality is middling to low but improving. Almost all of the improvement came in gross margins, meaning the company has gotten more efficient in manufacturing and operating costs have stayed stable. This is basically where I would end the screening work, stamp the company a viable possibility, and start getting more information.