Taking Stock--Sour on Landauer

Dear Mr. Berko: One of the bowlers in our bowling league bought 200 shares of Landauer Inc. at $59 last December and is so convinced that the stock will trade at $100 this year that some of us think he has inside information. He has been talking up this stock for more than a month, and a few of us are thinking about buying it. I was asked to email you for your thoughts and hope you will respond before we meet next week. Would this be a good investment?

ND, Kankakee, Ill.

Dear ND: Except for Landauer's (LDR-$60) 670 employees, their families and close friends, the mayor of Glenwood, Ill. (LDR's hometown), several local bankers, a small group of scientists, the mailman, and some phone company workers, very few people have heard of Landauer. And rightly so, because LDR is as interesting as watching iron rust, milk sour or water evaporate. This company provides technical and analytical services that measure occupational and environmental parameters to radiation exposure. LDR has three main segments. 1) Radiation measurement manufactures, distributes, collects, analyzes, monitors and reports exposure findings. This service is provided to hospitals, medical and dental offices, and nuclear facilities. 2) Medical physics provides clinical physics and accreditation support, equipment commissioning and equipment testing. 3) Medical products sells medical and consumer consumables used in radiology and radiation therapies.

This could be a sweet, nifty niche business, but it ain't. LDR is a small-cap company ($650 million) with small-cap management and a low-cap future. Ten years ago, revenues were an unimpressive $58 million. Though improving each year, revenues grew to a less unimpressive $155 million in 2012, and management reckons revenues will top $175 million in 2013. Earnings trudged begrudgingly forward most years, from $1.83 a decade ago to $2.03 last year and (some think) to $2.30 in 2013. LDR's poor earnings growth is the result of annually disappointing net profit margins, which have declined annually and impressively, from 28 percent 10 years ago to probably 16 percent this year. Declining net profit margins are usually the result of poor management, and I see many reasons to agree with this conclusion. Observers expect future revenue growth will be modest and believe that the board (if it had any spine) should focus on tightening loose screws, sealing leaky joints and retraining its befuddled managers, who wouldn't know a net profit margin from a bean taco. LDR's inutile board unwisely has raised its dividend in each year the past 10 years, which should have been better used to reduce debt. Last year's $2.20 dividend, yielding 3.6 percent, exceeds earnings, and the board may be dumb enough to raise the dividend again this year.

Landauer produces and markets many good, reliable, uncomplicated products, but at $60 this is not a good investment. The shares trade at 30 times earnings, and knowledgeable investors will tell you that considering past performance and potential revenue growth, this number is much too high. LDR's balance sheet is fair to middling, and the book value of its 10 million outstanding shares has been dead in the water. The company had a working capital deficit, and management recently had to borrow $130 million, a significant portion of which could have been avoided with proper planning. LDR's income statement isn't a pretty picture. Operating margins, like net profit margins, have collapsed; return on shareholder capital is terribly low; cash flow has improved, but capital spending is niggardly.

Unless LDR becomes a takeover candidate or the target of a leveraged buyout, I can't imagine where or how your friend came up with a $100 price objective. LDR is a stinky investment. It might be a good speculation, but not at the current price. The charts indicate that during four of the past five years, LDR could have been bought in the high $40s and then sold seven to nine months afterward in the mid- to high $60s. I think your bowling buddy bought LDR too close to the top.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@ yahoo.com.

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Published: Thu, Apr 11, 2013