With sales of about $10 million per year they have way too much inventory almost 4 years worth! They could be forced to writedown or heavily discount this inventory which would cause losses. See what they said here:
Total inventory, including long-term and consignment inventory, approximated $37.7 million as of September 30, 2010
Thanks again for posting your viewpoints. We can agree on some points, and debate others. Your viewpoint as a new follower/investor is appreciated.
I don't see the inventory as a problem. It doesn't become obsolete. There is no real cost to carrying (storing) it. I see it as all opportunity at this point. It is paid for. When it sells, they keep all the cash. The accounting numbers (standard metrics) will be what they will be, but the cash will be available for reinvestment.
Granted, those investors/analysts who don't dig deep (into CTHR) will look at standard metrics, and the inventory will look inappropriate. But CTHR shouldn't be valued on standard ongoing mature-company metrics anyway. (Which also means Mgt shouldn't be bragging about percentage increases in tiny revenue numbers, or small positive earnings due to cost cuts.) Moissanite is a huge opportunity. If C&C can capture that huge opportunity, CTHR shares have lots of upside (JMHO). If they don't capture it hugely, C&C could die on the vine. Again, JMHO.
There isn't really capital tied up. Unless you mean that they (previous Mgt) could have saved the cash spent on raw SiC and processing (faceting, etc). But that is water (cash) under the bridge at this point.
I don't think the inventory level should affect the prices they charge. There is no need for that. C&C is the sole source of M. They can charge whatever they want (whatever their salespeople can convince somebody to pay). And the inventory has no carrying cost, so C&C has no need to sell it quickly. They can set prices that maximize the total revenue they will generate over time from the existing inventory plus all future product. They shouldn't lower the price now to sell the inventory quicker, just to improve an accounting inventory number. Personally, I think they should raise the price steadly over time, but that is a whole other discussion.
<<<If their sales really start growing then the inv is no issue, but if they stay around $10 million annually,....>>>
I absolutely agree. But if they stay around $10 MM annually, C&C will die. They need to quickly (within a year or two) reach yearly sales levels that will make the current inventory look small. They'll never have a sustainable business at anywhere near the $10 MM/year level, at least not enough to support let alone grow the stock price.
Old Mgt said (but not a direct quote) $300 MM annually was a good initial (unofficial) target, and should be a no-brainer. The product is that good. There is no reason to shoot for sales below that level. This product should be selling over $1 Billion annually, easily. Because of past failures, the new Mgt must attempt to reach HUGE sales levels very quickly, or else C&C will whither away. Shareholders deserve a decent shot at success. I hope Mgt is aligned with that.
Also, you may not realize that the inventory is already counted as an asset on the balance sheet so even if they convert inventory to cash over the next several years it will not change their balance sheet in terms of book value.
If lots of inventory were a great thing then more companies would stock up four years worth of inventory like CTHR seems to have.
Extremely high inventory means management completely failed at projections. It also can cause for a huge write down because in all likelihood it will need to be discounted to sell it faster. It also is a lost opportunity because it costs money to store and insure it.