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.

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3 thoughts on “Summer Infant (SUMR) / cigar butt situation

  1. I completely agree that these prices are irrational. Yes the company is struggling, however they still are doing $60 million in sales a quarter, with quarter over quarter revenue growth. The products do need to improve, and shift focus into a niche, rather than just a company that sells the same products at the same price as everyone else. In my opinion these are the darkest days for the company with tremendous upside. Across the market, there are hundreds of companies that are yet to produce any profits, much less than 250 million in revenue this year. If summer infant were a private company, they would appear perfectly healthy, just grinding through adversity, with exponential growth to come as the economy cycles, and products catch on. It is crazy how many people dump the stock and have nothing but fearful things to say. The company is one good press release, and one good quarter from being back to healthy stock. With a new CFO, and Bazter from Wynnfield, do you really think they are not going to buckle down on expenses, push for every last dollar, and make it a priority to impress all of the doubters? Cleaning the sheets last quarter was the best move they could have possibly made, and going into next year, I am glad people are selling scared because at these prices, it is a gift to people that have balls. Every investor looks at charts from the past and wishes they had bought when the company was at their low, but the majority does not because they don’t look at the bigger picture, because they are so afraid of the market. I was buying sprint nine months ago, with analyst screaming sell, and people pulling out because they were scared. Nine months later with the stock up over 100%, guess who is buying again? I couldn’t guess what price sprint would get too, but i knew it was much more than a $2.15. Same with summer, I am not continuing to buy because I know more than anyone else, but I am confident summer infant is worth, much, much more than $1.25 per share.

  2. Hey!

    Looks like, in retrospect, that you caught the bottom perfectly!

    Can you post a little update (here or in a separate post) about what changed with the fundamentals to warrant such a price appreciation?

    Thanks.

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