I agree. Got more Monday and came close to another buy today. Despite the fact that there was really nothing else Ferguson could say, his point that instead of many low margin weekly orders plus a large special order one quarter a year at low margin, the better situation would be to sell much more medical product, more bed frames, and depend upon the sales force to try to keep a steady flow through the factories. And a few smaller low margin regular customers would not hurt either. The on-off nature of the deal with sinomax has been too rough on us. Many companies limit the importance of any one customer for just that reason.
Even without a predictable stream of earnings and some short/medium term bad news, great management and a well run business make the price at these levels very attractive.
Among the little noticed pleasures I find in reading our annual report (paragraph 18 on page 67) is reporting of both goodwill and intangibles. It's been some years since I studied accounting, but the fact that both items are apparently being amortized suggests honest reporting to me. I believe I've understood recently that companies pay more than book for acquisitions resulting in goodwill. They are required to periodically evaluate those amounts and to write down anything which does not look to be as valuable as it was estimated to be upon purchase. But I don't think they are now required to amortize those amounts.
Yet SPAN chooses to use a more conservative treatment and has decreased Canadian goodwill and intangibles from approximately $6mm to $4mm over the past two years. I think that should result in lower EPS than possible and a more accurate representation of book value. I should check to be sure I'm separating my financial and book accounting from tax accounting and know what is being reported in this section, so I may be wrong.
I've said several times lately that I like SPAN's management. They took a huge but necessary gamble in buying SPAN Canada. Huge because, while the dollar amount was not large, going from a single factory to two makes huge challenges. And going to one in a different country is even more difficult, even Canada. Last year sales from that division increased 30% or $2.8mm to $12mm. Now we see a single order which could increase this year's sales $1.9mm to a new customer. At least I think Toronto is a new customer though SPAN Canada is located nearby.
It now appears that the gamble taken by SPAN has paid off and they can be justly proud of not making a mistake. A third factory would be a smaller bite to take at this point and the funds are available to make another purchase. Yet I applaud management for not being in too much of a hurry in taking another huge risk. Purchases of companies generally favor the seller who of necessity know their business better than the acquirer possibly can.
Remember, SPAN is a very small specialized manufacturer. They cannot afford a mistake at this point. Their ability to survive a bad break like the loss of a major order, suggests that they have the ability to stand one blow, but they have competitors all around with more resources and similar products ready to take orders from us. We are good, but then, we have to be. There is plenty of potential for increased profit from the two divisions.
While the manufacturing effort hums along, the big opportunity comes to Clyde Shew and his ability to expand the customer base while the endeavor bed retains a lead position in the market. I was surprised to see that he was employed at SPAN longer than either Mr. Ferguson or Coggins. Thanks to Mr O'Reagan whom I don't believe I've yet met for the engineering of that bed.
Bed frames at about 17% of sales would be about $11mm and growing. This order will include mattresses I suppose, but still might include as much as $1.3 mm in frames each year or a good 10% of sales. I am encouraged though the order is unlikely to affect the earnings report for the quarter ending Mar 31. I might be willing to buy some more at $18 should I get such a chance before the effects of this order or of other pleasant surprised show up in the market. Always takes a while for small companies to have such news noticed and it's one reason I like owning such stocks. More time to think and react.
Thanks for the heads up. It is encouraging indeed as I believe their other big province contract came from British Columbia. I tried to post as a new topic, but Yahoo would not permit it. Anyway, medical bed frames amounted to 17% of total corporate sales last year, up from 13% in 2013, so we are seeing gradual uptake there. And that is where I look for a breakout in SPAN's size and profitability. The factory in Greenville is probably pretty constrained and I really am frightened of opening satellite facilities--it's so much easier to manage one factory--when one goes to multiple factories a whole new system must be developed and frequently the combination implodes.
A nice order today. I think this could be a nice opportunity for more orders down the road from other health inistuitions if their product meets or exceeds expectations.
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