LCI Industries – Currently Listed as ‘LCII’ on the New York Stock Exchange

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Company Overview

LCI Industries (“LCII”) supplies a range of components for original equipment manufacturers (“OEMs”) in the recreation and transportation product markets, consisting primarily of recreational vehicles (“RVs”) in conjunction with parallel industries such as buses, as well as trailers used to haul a myriad of products (e.g., livestock and boats). The Company operates and reports according to the following two segments:

  • Original Equipment Manufacturers (“OEM Segment”): Under this segment LCII manufactures and distributes the aforementioned OEM products which “consist primarily of fabricating, welding, thermoforming, painting, sewing, and assembling components into finished products” [5, 7, 9]. Examples include axles and suspension solutions; steel chassis and related components; and slide-out mechanisms and solutions.
  • Aftermarket Segment (the “Aftermarket Segment”): Under this segment LCII sells many of the OEM Segment’s products to the recreation and transportation product markets, typically to retail dealers, wholesale distributors, service centers; and direct to customers via the internet. This segment also includes the sale of discretionary accessories and replacement service parts, air conditioners, sound systems, televisions, and awnings to satisfy insurance claims.

The Company was incorporated under the laws of Delaware on March 20, 1984, being the successor to Drew National Corporation, a business incorporated under the laws of Delaware in 1962.

This Security Issue came to our attention at the price of approximately 94.67 at around mid-November 2022, with drafting of this Piece beginning soon after. At the time it initially piqued our interest for several reasons, including:

  • The Company’s low P/E ratio
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5
  • The Company’s current ratio
  • The Company’s previous earnings consistency and stability
  • The Company’s cash dividend payments

Our Suspected Valuation at First Glance: Possibly ‘Silver’

 

Company Financials

All of the discussions below are based on the data presented in the Company’s SEC filings [3 – 23].

Table 2 – 1 below shows the Company’s annual net income and diluted earnings per share, alongside their three-year averages:

Table 2 – 2 below shows data extracted from LCII’s most recently published SEC filing (10-Q) [3] regarding their balance sheet:

Using the information presented in the table above (Table 2 – 2) we have constructed a new table below (Table 2 – 3), consisting of the discernible tangibles which we here find more useful. We have included the values of these assets as stated on the balance sheet, alongside three liquidation values i.e., their ‘realizable value’ as presented in ‘Security Analysis’ (pg. 560) [1]:

Table 2 – 4 below shows how many of the Company’s relative assets and liabilities (as presented in Table 2 – 3) are attributable to each of the Company’s common shares:

 

Initial Discussions Regarding the Company’s Financials

The Issue’s current ratio is 2.88 in accordance with Table 2 – 3, and Table 2 – 4 above. The best, average and worst-case scenarios are 2.27, 2.02 and 1.63 respectively, all of which are above the minimum recommended figure of 1.5. The Issue fails the acid test in all four instances.

The long-term debt value exceeds 110% of the net current asset value in all four scenarios.

The Company has not demonstrated any losses over the last decade, and it is our opinion that the earnings have been fairly consistent. We believe the five- and 10-year averages can be taken as a reliable indication of the Issue’s previous earning power as opposed to the by-product(s) of a random assortment of numbers. We do see the argument however that the recent earnings have skewed the 10-year average, a tad more than the 5-year average but either way we believe the earnings to be consistent.

The Company has an uninterrupted dividends streak going back to 2014.

The Company’s most recent annual earnings were larger than those of six years prior; and looking at the three-year averages of our diluted EPS (beginning 2013) we can see that over the latest fiscal decade, the EPS have increase by approximately 296%.

The discernible tangible equity per share is 1.96 in accordance with Table 2 – 4 above; and we calculate the best, average, and worst-case scenarios to be -14.47, -23.27 and -31.28, respectively. The current price of 105.50 is greater than 120% of the only positive value, with the latter three being negative thus rendering the 120%-price-paid-to-DTE metric invalid.

 

The following points are for the more-involved investor(s)/shareholder(s); those who view common stock holdings as part-ownerships in an enterprise, irrespective of the short term public valuations, and not merely a tradable certificate “which can be sold in a matter of minutes” [2]. All of the points presented below have been factored into our valuation of this Security Issue here discussed.

Further Discussions Regarding the Company’s Financials

There were three main points we felt warranted further discussion or highlighting here as opposed to a single bullet point under the ‘Additional Observations Regarding the Company’s Filings’ subsection. Here we shall remind the reader that it is up to them and anyone else to whom it may concern, to come to their own conclusions after carefully considering the information they encounter during their own investigative works. We felt that the following three points were to be highlighted but of course some of you may naturally disagree and in your perhaps more, or even less informed opinion may have a different take on the information presented.

LCII’s Acquisition Proclivity

As the title to this subsection implies LCII presents as an Issue with a tendency to acquire smaller entities. Typically, the Board’s Committee that assists in fulfilling oversight responsibilities relating to the formulation and execution of strategies, has the most meetings per year out of the Board’s five committees, something which maybe speaks the strategy’s arbitrary but relative importance. Directly below is a list of the Business’ acquisitions from 2017 – 2021 onwards:

  • “In February 2017, the Company acquired 100 percent of the outstanding shares of SessaKlein S.p.A. (“SessaKlein”), a manufacturer of highly engineered side window systems for both high speed and commuter trains, located near Varese, Italy. The purchase price was $8.5 million paid at closing, plus contingent consideration based on future sales by this operation” [13].
  • “In May 2017, the Company acquired the business and certain assets of Lexington LLC (“Lexington”), a manufacturer of high quality seating solutions for the marine, RV, transportation, medical and office furniture industries located in Elkhart, Indiana. The purchase price was $40.1 million paid at closing” [13].
  • “In June 2017, the Company acquired 100 percent of the equity interests of Metallarte S.r.l. (“Metallarte”), a manufacturer of entry and compartment doors for the European caravan market located near Siena, Italy, and its subsidiary, RV Doors, S.r.l., a manufacturer of driver-side doors located near Venice, Italy. The purchase price was $14.1 million paid at closing, plus contingent consideration based on future sales by this operation” [13].
  • “In January 2018, the Company acquired 100 percent of the equity interests of Taylor Made Group, LLC (“Taylor Made”), a marine supplier to boat builders and the aftermarket, as well as a key supplier to a host of other industrial end markets, located in Gloversville, New York. The preliminary purchase price was $88.9 million paid at closing” [13].
  • “In February 2018, the Company acquired substantially all of the business assets of Hehr International Inc. (“Hehr”), a manufacturer of windows and tempered and laminated glass for the RV, transit, specialty vehicle, and other adjacent industries, headquartered in Los Angeles, California. The preliminary purchase price was $49.9 million paid at closing” [13].
  • “In June 2018, the Company acquired 100 percent of the equity interests of ST.LA. S.r.l., (“STLA”), a manufacturer of bed lifts and other RV components for the European caravan market, headquartered in Pontedera, Italy. The purchase price was $14.8 million, net of cash acquired, paid at closing, and is subject to potential post-closing adjustments related to net working capital” [11].
  • “In November 2018, the Company acquired the business and certain assets of the furniture manufacturing operation of Smoker Craft Inc., (“Smoker Craft”), a leading pontoon, aluminum fishing, and fiberglass boat manufacturer located in New Paris, Indiana. The purchase price was $28.1 million paid at closing” [11].
  • “In June 2019, the Company acquired 100 percent of the equity interests of Femto Engineering S.r.l. and related entities (collectively, “Femto”), an engineering company with a focus on designing and manufacturing of plastic moldings, headquartered in San Casciano, Italy. The purchase price was $6.5 million, net of cash acquired” [9].
  • “In June 2019, the Company acquired 100 percent of the equity interests of Lavet S.r.l. (“Lavet”), a manufacturer of window blind systems for European leisure vehicles, headquartered in Siena, Italy. The purchase price was $2.4 million, net of cash acquired” [9].
  • “In August 2019, the Company acquired 100 percent of the equity interests of Lewmar Marine Ltd. and related entities (collectively, “Lewmar”), a supplier of leisure marine equipment, headquartered in Havant, United Kingdom. The purchase price was $43.2 million, net of cash acquired” [9].
  • “In August 2019, the Company acquired 100 percent of the equity interests of Ciesse Holdings S.r.l. and related entities (collectively, “Ciesse”), a supplier of railway interior products and systems, headquartered in Rignano sull’Arno, Italy. The purchase price was $5.4 million, net of cash acquired” [9].
  • “In October 2019, the Company acquired substantially all of the business assets (collectively referred to under the business name “SureShade”) of Rodan Enterprises, LLC, a designer and manufacturer of sunshade systems for the outdoor recreation industry in North America and Europe headquartered in Philadelphia, Pennsylvania. The purchase price was $14.0 million, subject to certain adjustments and a holdback of $1.4 million for indemnity matters and certain potential post-closing adjustments related to net working capital” [9].
  • “In November 2019, the Company acquired the PWR-ARM brand and electric powered Bimini business assets of Schwintek, Inc. (“PWR-ARM”), a premier electric sunshade solution for pontoon and smaller power boats. The purchase price was $45.0 million, which includes holdback payments of $5.0 million” [9].
  • “In December 2019, the Company acquired 100 percent of the equity interests of CURT Acquisition Holdings, Inc. (with its subsidiaries, “CURT”), a leading manufacturer and distributor of branded towing products and truck accessories for the aftermarket, headquartered in Eau Claire, Wisconsin. The purchase price was $337.6 million, net of cash acquired, and is subject to potential post-closing adjustments related to net working capital” [9].
  • “In January 2020, the Company acquired 100 percent of the equity interests of Polyplastic Group B.V. (with its subsidiaries “Polyplastic”), a premier window supplier to the caravaning industry, headquartered in Rotterdam, Netherlands. The purchase price was $95.8 million, net of cash acquired, plus contingent consideration of $2.8 million, which was based on sales by this operation. Net sales for Polyplastic were approximately $62 million for the twelve months preceding the acquisition” [7].
  • “In November 2020, the Company acquired substantially all of the business assets of Challenger Door, LLC (“Challenger”), a leading manufacturer and distributor of branded doors for the RV industry and products for specialty and cargo trailers, based in Nappanee, Indiana. The purchase price was $35.0 million, which includes holdback payments of $4.5 million to be paid over the next two years. Net sales for Challenger were approximately $82 million for the twelve months preceding the acquisition” [7].
  • “In December 2020, the Company acquired 100 percent of the outstanding capital stock of Veada Industries, Inc. (“Veada”), a manufacturer and distributor of boat seating and marine accessories based in New Paris, Indiana. The purchase price was $69.0 million, net of cash acquired, which includes holdback payments of $12.2 million to be paid over the next two years. Net sales for Veada were approximately $82 million for the twelve months preceding the acquisition” [7].
  • “In April 2021, the Company acquired 100 percent of the equity interests of Schaudt GmbH Elektrotechnik & Apparatebau (“Schaudt”), a leading supplier of electronic controls and energy management systems for the European caravan industry located in Markdorf, Germany. The purchase price was approximately $29.4 million. Net sales for Schaudt were approximately $25 million for the twelve months preceding the acquisition” [5].
  • “In April 2021, the Company acquired 100 percent of the equity interests of Kaspar Ranch Hand Equipment, LLC (“Ranch Hand”), a manufacturer of custom bumpers, grill guards, and steps for the automotive aftermarket headquartered in Shiner, Texas. The purchase price was approximately $56.9 million, plus contingent consideration up to $3.0 million. Net sales for Ranch Hand were approximately $49 million for the twelve months preceding the acquisition” [5].
  • “In September 2021, the Company acquired 100 percent of the share capital of Furrion, a leading distributor of a large range of appliances and other products to OEMs and aftermarket customers in the RV, specialty vehicle, utility trailer, horse trailer, marine, transit bus, and school bus industries. The total fair value of consideration, net of cash acquired, was approximately $146.7 million. The Company paid $50.5 million in cash consideration at closing, net of cash acquired, with fixed payments of $31.3 million due on each of the first and second anniversaries of the acquisition in September 2022 and September 2023” [5].
  • “In October 2021, the Company acquired certain business assets of Stampede Presentation Products, Inc. d/b/a Exertis (“Exertis”), a global distribution company, in exchange for $39.7 million. The acquisition qualifies as a business combination for accounting purposes and supports the recent acquisition of Furrion Holdings Limited (“Furrion”) by allowing the Company to provide logistics and warehousing to serve Furrion’s North American customer base” [5].
  • “During the year ended December 31, 2021, the Company completed two other acquisitions totaling $17.8 million of cash purchase consideration, plus holdback payments of $2.1 million to be paid over the next two years and contingent consideration of up to $2.0 million. Holdback payments of $0.6 million were paid during the year ended December 31, 2021. Net sales for these acquisitions were approximately $23 million for the twelve months preceding the acquisitions” [5].

No doubt the list is expansive and the take-over path is one the Company has wilfully dove headfirst into. Whilst the clear acquisition propensity is impossible to ignore and has of course contributed towards many financial metric increases, it doesn’t seem like LCII is 100% dependant on these for their net income increases as shown in the commentary below from the last several 10-K filings:

  • “Consolidated net sales for the year ended December 31, 2017 increased to a record $2.1 billion, 28 percent higher than the consolidated net sales for the year ended December 31, 2016 of $1.7 billion. Acquisitions completed by the Company in 2017 added $42 million in net sales” [13].
  • “Consolidated net sales for the year ended December 31, 2018 increased to a record $2.5 billion, 15 percent higher than consolidated net sales for the year ended December 31, 2017 of $2.1 billion. The increase in year-over-year sales reflects growth across the Company’s segments, as well as acquisitions completed by the Company over the twelve months ended December 31, 2018 which added $231.4 million in net sales” [11].
  • “Consolidated net sales for the year ended December 31, 2019 were $2.4 billion, a decline of 4 percent from the consolidated net sales for the year ended December 31, 2018 of $2.5 billion…Net sales from acquisitions completed by the Company over the twelve months ended December 31, 2019 contributed $93 million in 2019” [9].
  • “Consolidated net sales for the year ended December 31, 2020 were $2.8 billion, an increase of 18 percent from the consolidated net sales for the year ended December 31, 2019 of $2.4 billion…The increase in year-over-year net sales was primarily driven by the impact of acquisitions, organic growth in the Aftermarket Segment, and a significant increase in RV retail demand following COVID-19 shutdowns in the first half of the year…Net sales from acquisitions completed in 2020 and 2019 contributed approximately $374.7 million to net sales in 2020” [7].
  • “Consolidated net sales for the year ended December 31, 2021 were $4.5 billion, an increase of 60 percent from the consolidated net sales for the year ended December 31, 2020 of $2.8 billion. The increase in year-over-year net sales was primarily driven by record RV retail demand, the impact of acquisitions, and organic growth in the Aftermarket Segment…Net sales from acquisitions completed in 2021 and 2020 contributed approximately $269.9 million to net sales in 2021” [5].

What we will say is the majority of the acquisitions are related to the Business’ modus operandi which is another positive although you do have self-acknowledgements like the following:

We have entered new markets in an effort to enhance our growth potential, and uncertainties with respect to these new markets could impact our operating results. [5, 7, 9]

The negative elements however include the fact that a lot is being paid for intangible assets, and debt is often rolled over and has gone up over the years on account of the acquisitions e.g., “we made net repayments on our revolving credit facility of approximately $181 million from May through October 31, 2020 (prior to net borrowings in November and December primarily to fund acquisitions)” [7].

The latest 10-Q filing has detailed additional acquisitions, which we did not include in the list above as they were not necessary to highlight the point. We do think they should be considered however. We don’t know if shares are issued as consideration for acquisitions, but we have assumed it to not be the case.

Customer Concentration Risk

LCII has a customer risk concentration that could not go unnoticed, with a significant proportion of their net sales coming from two customers: Thor Industries, Inc., which can be found under the stock ticker “THO”; and Berkshire Hathaway Inc. (through its subsidiaries Forest River, Inc. and Clayton Homes, Inc.), which can be found under the stock ticker “BRKA”). In Table 4 – 1 below is the percentage of LCII’s net sales that each of the aforementioned entities contributed towards, for each fiscal year over the last decade:

Clearly these are somewhat significant and in our opinion suspicion of a co-dependency type situation are not completely without merit. With that in mind we decided to have a glance at a few financial metrics which we have tabulated in Table 4 – 2 below. The relevant data points were taken from the most recent possible data in instances where the values have differed across year end 10-K filings, as per our usual procedure.

It does not appear that either of these Companies are in any financial turmoil so those fears could perhaps be quelled. However, there is always the possibility for both micro and/or macro-economic deterioration resulting in unfavourable conditions for either customer, resultantly impacting LCII. There is also the possibility in either terminating their arrangements or sourcing their components elsewhere, thus we ask all readers to be vigilant and keep a discerning eye on all relevant matters if necessary.

Whilst on the matter of a possibly disproportionate risk, when addressing their raw materials or components they repeatedly state “a few key components are currently produced by only a small group of quality suppliers that have the capacity to supply large quantities” [5, 7, 9, 11, 13, 15]. There was little to no elaboration however, and further detail requests may be desired by some.

Executive Compensation

Typically, this would be a sub-bullet point in either our ‘Additional Observations Regarding the Company’s Filings’ sub-section down below or another topic for further discussion, but our findings were surprisingly atypical as demonstrated by the proceeding excerpt:

We value the opinions of our stockholders and regularly solicit input on our executive compensation program. In evaluating the design of our executive compensation and the compensation decisions for each of our named executive officers, the Compensation Committee considers stockholder feedback, including the advisory “say-on-pay” vote at our annual meeting. In 2021, 23% of the votes cast approved the compensation of our named executive officers. [4]

23% is not a percentage we have seen before and rather consternation worthy. It is a notable decrease from the previous year’s results which also seemed rather bleak:

At the Annual Meeting of Stockholders held on May 21, 2020, our stockholders approved, in an advisory vote, the compensation paid to our NEOs for 2019. In the advisory vote, 67% of the votes cast voted in favor of the 2019 compensation. [6]

And the 67% just mentioned directly above was again a notable decrease from the previous year’s approval rating:

At the Annual Meeting of Stockholders held on May 23, 2019, our stockholders approved, in an advisory vote, the compensation paid to our NEOs for 2018. In the advisory vote, 94% of the votes cast voted in favor of our NEOs’ 2018 compensation. Although the vote was non-binding, the Compensation Committee (or, in this CD&A, the “Committee”) reviewed the results of the vote and considered the approval rate as an indication that stockholders support the Company’s executive compensation philosophy and decisions. [8]

Clearly things have not improved, at least in the eyes of Company Shareholders. Funnily enough, after 2020’s results LCII reached out to solicit feedback from the holders of 71% of their institutionally held shares and following the further drop to 23% the Company again reached out and solicited feedback from the holders of 71% of LCII’s institutionally held shares. The details of their outreach programs are outlined in the latest two DEF 14As and won’t be repeated here but we will say that anybody who is sceptical of such a program’s efficiency considering the voting percentage deterioration is more than warranted in being so. The Company did make changes to their compensation plan e.g., acquisitions no longer being a metric to measure executive performance (something which in our opinion blatantly never should have been the case to begin with) but non-GAAP measures are still used to help determine EO compensation, including links to stock price appreciation. We are very curious to know if the smaller level shareholders (including “amateur” individuals) were included in these at all, although it does not appear to be the case. Confirmation should perhaps be sought with Management however, especially for all current and prospective investors of this Security Issue. Finally, we’ll finish this paragraph off with a list of additionally undesirable facets of EO compensation we noted: (i) The CEO pay ratio is notably high; (ii) the CEO is involved in the compensation determination of other EOs; and (iii) there are excessive potential payments on termination or change-in-control.

This subsection’s final point will be regarding the switching of independent compensation consultants a matter no doubt related to what we have just discussed, even if it is tangentially so. Please see the following extract from the Company’s 2020 DEF 14A filing:

In September 2018, in an effort to gain a fresh perspective on executive compensation, the Committee engaged Towers Watson Delaware, Inc. (“Willis Towers Watson”) to replace Exequity as the independent compensation consultant reporting directly to the Committee and to perform such ongoing general advisory services that were previously provided by Exequity…Prior to its replacement, Exequity reviewed the peer group of 20 publicly traded companies used by the Committee when evaluating our compensation programs for 2018 and did not suggest any changes for 2019. Upon Willis Towers Watson’s engagement, Willis Towers Watson reviewed the Exequity-recommended peer group and did not suggest any changes. [8]

The first part of the quote appears to contradict the tail end (demarcated by the ellipses) and to us it’s not apparently obvious what elements of a “fresh perspective” LCII was pursuing, but perhaps that is a matter for Management to confirm with the curious amongst you.

Additional Observations Regarding the Company’s Filings

Points we feel may be considered neither positive nor negative

  1. With regards to the 2008-2009 economic downturn. The Company profited during fiscal 2008 but not 2009.
  2. The Business may currently be a business cycle expansion.
  3. The Company is not overly conservatively capitalized so may make for an interesting speculative purchase in this regard.
  4. Recently the Company has provided predictions and expectations on their effective tax rates, depreciation and amortization etc., but this a relatively new event so we cannot commit to a comment on such prediction’s accuracy.
  5. The Company has said that their subsidiaries are wholly-owned.
  6. We did not observe a history of stock splits [28].
  7. In 2018 the Company’s Board of Directors authorized a new stock repurchase program under which LCII stock was repurchased during fiscal 2018. Stock has not been repurchased since.
  8. The Company has treasury stock, the intentions with which we are unsure of.
  9. The Company has not mentioned how the stock options were priced.
  10. Net income and comprehensive income typically approximate to the same value.
  11. The Company’s inventories are stated at the lower of cost (using the first-in, first-out (FIFO) method) or net realizable value since fiscal 2019. Prior to that they were stated at the lower of cost (using the first-in, first-out method) or market.
  12. The effective tax rates, very consistently approximate to the statutory tax rate and do not vary much year-over-year; and the latest 10-K filing said “as of December 31, 2021, the Company had deferred tax assets recorded related to foreign net operating losses and tax credit carryforwards of $10.1 million, net…The net operating losses and tax credit carryforwards have indefinite lives…The foreign valuation allowance for U.K. deferred tax assets as of December 31, 2021 and 2020 was $0.9 million and $2.6 million, respectively” [5].
  13. Part of the Company’s debt is secured and unsecured, with the latter including convertible unsecured notes which LCII issued during 2021 although we have not looked at their investment suitability due to their infancy.
  14. There are no large or concerning payments that we noted.
  15. There has been no recent decline in asset values, current assets in particular.
  16. Since the 2013 10-K filing, the Business has identified as a “large accelerated filer” in Rule 12b-2 of the Exchange Act. Prior to that it was an “accelerated filer”.
  17. The treasury stock has remained the same at the earlier part of the year.
  18. The equity compensation plan information for fiscal 2017 is different in the relevant 10-K and DEF 14A filings.
  19. The latest 10-K filing listed the estimation of certain product warranty accruals as a critical audit matter, a critical audit matter that has been present for the last three 10-K filings.
  20. The Company has repeatedly referenced ‘steel and aluminum’ making up a significant portion of their raw material costs, thus them being tied to this however we have not here warranted this a topic for further conversation.

Points we feel may be considered negative

  1. The Company included the depreciation charges of fixed assets in the ‘cost of sales’, and ‘selling, general and administrative expenses’ lines on the income statement. The Company depreciates fixed assets on a “straight-line basis over the estimated useful lives of the properties and equipment” [5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25, 27], and the estimated useful lives were as follows: (i) ‘buildings and improvements’ is 10-40 years; (ii) ‘leasehold improvements’ was 2-5 years in fiscal 2011, which then became 2-10 years in fiscal 2012, then 3-10 years in fiscal 2013, then 3-12 years in fiscal 2019, then 3-20 years in fiscal 2020; (iii) ‘machinery and equipment’ was 2-12 years in fiscal 2011, then 2-15 years in 2012, then 3-15 years in 2013; and (iv) ‘furniture and fixtures’ was initially 3-8 years, then 3-15 years in in fiscal 2020. All of these changes are curious to us.
  2. There is a high institutional ownership percentage of the common shares outstanding (87.08% at the time of this Piece’s publication [29]).
  3. Since the 2013 annual report the Company has maintained that they are subject to proceedings, lawsuits, regulatory agency inquiries, and other claims as part of their process but has not provided any examples. The assertation of their troubles still exist.
  4. The Company often makes use of derivatives.
  5. We found a few Management observations unfavourable:
    1. Most of the DEF 14As from the latest decade detail delinquent Section 16(a) reports.
    2. There are repeatedly detailed related party transactions involving members of the ‘Lippert’ family and one of the Company’s customers Barletta Boat Company, LLC (“Barletta”) in which one of the Directors previously held a 38% share in, prior to its sale in August, 2021.
    3. Since the 2014 proxy statement, the Company’s DEF 14As have elected to nominate a different number of Directors every single year.

Points we feel may be considered positive

  1. We would say the operations of the Company are easy for the layman to comprehend.
  2. The Business has been around for at least a few decades, thus has stood the test of time.
  3. This is a relatively large company in terms of consolidated financials.
  4. We do not here suspect any corporate pyramiding.
  5. We did not note any non-recurring charges or unusual payments etc. constantly occurring for a prolonged period of time.
  6. There have been more year-over-year increases in cash and cash equivalents than there have been decreases over the latest decade.

Possible Questions for LCII’s Approximate 226 Stockholders to Consider, Investigate and/or Raise with Management

  1. Has the Company ever verified or investigated any of the industry and market data it gives a forewarning of, at the start of their 10-K filings?
  2. In recent years the Aftermarket Segment has contributed a larger and larger percentage of the total consolidated net sales. What does the Company envision for this segment relative to the Company’s future and relative to all consolidated earnings?
  3. Since the 2013 annual report the Company has maintained that they are subject to proceedings, lawsuits, regulatory agency inquiries, and other claims as part of their process but has not provided any examples. Can examples be provided?
  4. Can the Company provide any details on any product recalls that have occurred in recent years?
  5. The Company’s annual marketing and advertising expenditures have increased exponentially over less than a decade. Does Management truly think value is being earned here?
  6. The Company has mentioned the implementation of the enterprise resource planning (“ERP”) which it has been actioning since 2013. When is this expected to be completed and why is it taking so long?
  7. Going forward can the Company provide full comprehensive breakdowns of the “other current assets” and “other long-term assets” listed in their 10-K and 10-Q filings?
  8. Going forward can the “fixed assets” on all 10-Q filings be broken down into their further components?
  9. The Company depreciates fixed assets on a “straight-line basis over the estimated useful lives of the properties and equipment” [5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25, 27], and the estimated useful lives were as follows: (i) ‘buildings and improvements’ is 10-40 years; (ii) ‘leasehold improvements’ was 2-5 years in fiscal 2011, which then became 2-10 years in fiscal 2012, then 3-10 years in fiscal 2013, then 3-12 years in fiscal 2019, then 3-20 years in fiscal 2020; (iii) ‘machinery and equipment’ was 2-12 years in fiscal 2011, then 2-15 years in 2012, then 3-15 years in 2013; and (iv) ‘furniture and fixtures’ was initially 3-8 years, then 3-15 years in fiscal 2020. Why have all of these changes been made?
  10. The last two 10-K filings have said “the Company is currently under examination by the U.S. Internal Revenue Service for the tax year 2018” [5, 7]. Is everything here in order?
  11. Are the Company’s subsidiaries wholly-owned?
  12. Why do Management think the number of Company stockholders has gone from 531 and 502 as of February 2011 and 2012 respectively, to 253 and 226 as of February 2021 and 2022 respectively?
  13. Why was the number of shares issued and outstanding not on the latest 10-K and 10-Q filing’s balance sheets?
  14. How are the Company’s stock options priced?
  15. What are the Company’s intentions with their treasury stock?
  16. Why have no shares been repurchased since 2018?
  17. In hindsight, can the Company elaborate on the “fresh perspective” they aimed to gain when they switched independent compensation consultants in 2018 and how it has benefited Shareholders?
  18. The Company has referenced their Company’s Chief Operating Decision Maker (“CODM”) but not said who they are. Who is this individual?
  19. Why did the Company recently expand their stock ownership guidelines to include all of their named executive officers?
  20. When the Company undertakes shareholder outreach programs do they reach out to the smaller or individual shareholder and if so, how so?
  21. Was any Director or EO a founder or co-founder of the Company? Or a descendant of such?
  22. Since the 2014 proxy statement, the Company’s DEF 14As have elected to nominate a different number of Directors every single year. Why does this keep on changing?

 

Valuations

The price of this Security Issue at the time of this Piece’s publication is 105.50. Using our most recent three-year average of the diluted EPS (6.37) as opposed to the most recent EPS figure (8.94) increased the P/E ratio from 11.81 to 16.56; and using our discernible tangible equity value per share (1.96) as opposed to the stated book value per share (43.43, in accordance with Table 2 – 2) has increased the P/BV ratio from 2.43 to 53.69. With that in mind and considering current federal interest rates (4% at the time of writing), the current price does not appear to offer a sufficient margin of safety as per Benjamin Graham’s concept i.e., “over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid” [2]. We should now also remind the reader of some of Graham’s other thoughts regarding the ‘margin of safety’ principle, viz.:

Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion…It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity provided that the buyer is informed and experienced and that he practices adequate diversification. [2]

Taking our most recent three-year average value of 6.37 for diluted EPS and our stated discernible tangible equity value per share of 1.96, and multiplying the corresponding P/E and P/BV ratios of 16.56 and 53.69 respectively, we get a figure of 889.36, which is above Graham’s recommended upper-limit of 22.5 (which in this instance would corroborate with a share price of approximately 16.78).

Finally, we can make the following conclusions regarding the original points that initially piqued our interest in the Issue, considering our adjustments:

  • The Company’s low P/E ratio – no longer valid
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5 – no longer valid
  • The Company’s current ratio – still valid
  • The Company’s previous earnings consistency and stability – still valid
  • The Company’s cash dividend payments – still valid

Whether the current price is reflective of the Company’s future, present and past, in the reader’s opinion is for the reader to decide based upon their own research, however in our opinion this Security Issue appears currently fairly overvalued on account of its current and previous quantitative showing.

Our Valuation: Rubber

This Issue done moderately in our ‘Initial Discussions Regarding the Company’s Financials’ section. Our main reason for the lower valuation is the current pricing point. As it currently stands however, for us to have assigned this Issue the next highest valuation of ‘Lead’ it would likely have had to come in at a pricing point of approximately 60-80.

At this point in time and all matters here considered, this is not stock pick we would likely follow nor likely add to a stock portfolio even at a seemingly reasonable price.

 

References

  1. Graham, B., Dodd, D.L., Security Analysis, (6th edition), (Warren, B.E., Klarman, S.A., Grant, J., Laderman, J.M., Lowenstein, R., Marks, H.S., Merkin, J.E., Berkowitz, B., Greenberg, G.H., Greenwald, B., Abrams, D), McGraw-Hill Education, 2008 – {ISBN 10: 0071592539/ISBN 13: 9780071592536 & ISBN-13: 978-0071592536/ISBN-10: 0071592539}
  2. Graham, B., The Intelligent Investor, (Revised Subsequent Edition), (Warren, B.E., Zweig, J), Harper Business, 2006 – {ISBN-10: 9780060555665 / ISBN-13: 978-0060555665}
  3. LCII’s 3rd 2022 quarterly fiscal report (10-Q) – https://www.sec.gov/Archives/edgar/data/763744/000076374422000080/lcii-20220930.htm
  4. LCII’s 2022 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000114036122012894/ny20002231x1_def14a.htm
  5. LCII’s 2021 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000076374422000016/lcii-20211231.htm
  6. LCII’s 2021 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000114036121011595/nc10020215x1_def14a.htm
  7. LCII’s 2020 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000076374421000019/lcii-20201231.htm
  8. LCII’s 2020 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000114036120008113/nc10009120x1_def14a.htm
  9. LCII’s 2019 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000076374420000030/lcii-20191231.htm
  10. LCII’s 2019 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000114036119006793/nc10000721x1_def14a.htm
  11. LCII’s 2018 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000076374419000018/lcii-20181231.htm
  12. LCII’s 2018 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000076374418000115/lciiproxy2018.htm
  13. LCII’s 2017 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000076374418000042/lcii-12312017x10k.htm
  14. LCII’s 2017 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000076374417000121/lciiproxy2017.htm
  15. LCII’s 2016 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000076374417000049/lcii-12312016x10k.htm
  16. LCII’s 2016 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000076374416000402/dwproxy2016.htm
  17. LCII’s 2015 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000076374416000351/dw-12312015x10k.htm
  18. LCII’s 2015 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000076374415000099/dwproxy2015def.htm
  19. LCII’s 2014 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000076374415000037/dw-12312014x10k.htm
  20. LCII’s 2014 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000144530514001318/dwproxy2014.htm
  21. LCII’s 2013 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000143774914003110/dw20140227_10k.htm
  22. LCII’s 2013 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000143774913004291/dw_def14a-052313.htm
  23. LCII’s 2012 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000143774913002733/dii_10k-123112.htm
  24. LCII’s 2012 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000143774912003725/drew_def14a-052412.htm
  25. LCII’s 2011 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000143774912002281/drew_10k-123111.htm
  26. LCII’s 2011 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/763744/000114420411020879/v217600_def14a.htm
  27. LCII’s 2010 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/763744/000114420411014319/v214397_10k.htm
  28. https://www.stocksplithistory.com/?symbol=lcii
  29. https://www.gurufocus.com/stock/LCII/ownership

 

Throughout this Piece, any mention of a given year’s annual report refers to the 10-K filing/annual report which represents the financial year ended that same year, typically in the calendar month of December, i.e., any mention of the ‘2019 10-K filing’ or ‘2019 annual report’ etc. refers to the 10-K filing representing the fiscal year ended December 2019. The filings are usually published a few months later, the following calendar year.

Throughout this Piece, any mention of a given year’s proxy statement refers to the DEF 14A filing/proxy statement which accompanied the most recent 10-K filing, i.e., any mention of the ‘2020 proxy statement’ refers to the DEF 14A form which accompanied the 2019 10-K filing; usually published not too soon after the 10-K filing (typically the same calendar year relative to the 10-K filing’s filing date).

 

Disclaimers and Disclosures – https://wp.me/PcbS4Q-V