Description

How about a company that traces its origins to the 1800’s and sells gloves, balloons and pet toys? No complex nanotechnology or genome-specific pharmaceutical phase II drugs are to be found here. In this age of complex technology, when we honestly often don’t have a clue about the products that our companies sell, isn’t refreshing to invest in a simple company that we could explain to our five year old daughter in a few minutes? In addition, what if we could buy this straightforward company below net working capital and at a low multiple of rising earnings?

 

Work Gloves

      Boss Holdings, Inc. (Boss) has been operating in the work gloves and protective wear business segment since 1893. In addition, Boss conducts operations in the pet supplies business and promotional and specialty products business. Boss acquired a pet supplies business in 2002, a promotional and specialty products company in 2004, and a specialty lighting products business in 2005.  The pet supplies business has not been a significant contributor to operating income but the promotional and specialty products business has been a homerun.

Boss imports, markets and distributes gloves, boots and rainwear products in both the consumer and industrial markets, with each representing about half of sales in this segment. (The company ceased domestic manufacturing operations during 2000 and is now primarily an importer and marketer.)  The consumer market consists of retailers ranging from convenience stores to mass merchandisers as well as hardware, and grocery stores. The industrial market includes various commercial users of gloves and protective wear. These end-users include companies in the agricultural, automotive, energy, lumber and construction industries. These markets are very competitive but having participated in this segment for over 100 years, the Boss trade name is well known in the industry and provides a competitive advantage.

      Sales in the work gloves and protective wear segment have historically exhibited seasonal fluctuations. Cold weather months generally provide increased sales while warm weather historically results in reduced sales activity. Because of this seasonality, work gloves and protective wear sales tend to be higher in the Company’s first and fourth quarters while lower during the second and third quarters. (It is for this reason that the promotional business, with sales much stronger in the summer, has provided such a great complement to the glove business.)

      During the fourth quarter of 2002, the company entered into a trademark license agreement with Caterpillar Inc. under which the Boss markets work gloves and rainwear under the CAT® trademark. Sales of CAT® products have steadily increased since their introduction in 2003, with total sales of $2.2 million in 2006, representing 6% of domestic sales in the work gloves and protective wear segment for the year. Boss expects that the CAT® trademark will provide additional sales growth opportunities while allowing the company to introduce new products that are less sensitive to market pricing pressures. New products being introduced in 2007 under the CAT® trademark include tool belts, tool bags and hats with hands-free illumination.

Promotional Products

      During the third quarter of 2004,  Boss acquired Galaxy Balloons, Incorporated (“Galaxy”), a Cleveland, Ohio based company operating in the promotional and specialty products segment. Galaxy provides custom imprinted balloons, mini-sport balls, signature balls, exercise balls, beach balls and other inflatable products. In addition, Galaxy has broadened its product line to include various non-inflatable imprinted items including yo-yos, juggle balls, sport horns, fan-ta-sticks, holiday candles and ornaments. A broad based group of end-users, from banks to hotels to schools, purchase Galaxy’s custom imprinted products for advertising and promotional purposes. Examples include miniature footballs and basketballs thrown into the crowds at sporting events and helium filled balloons given to children at restaurants. The products offered by Galaxy provide customers with the opportunity to get their name in front of many potential customers for maximum exposure at a relatively small advertising cost.

          Based on results from prior years, management expects seasonal sales fluctuations in the promotional and specialty products segment. Historically, sales in this segment reach a low point during the first and fourth quarter of the year then build to a peak in late summer and early fall due to the sales of football related products. This is totally complementary to the glove business which has the opposite sales profile. To reduce the seasonality in the fourth quarter, Galaxy expanded its product line to include Christmas ornaments, candles and other products that sell well during the fourth quarter. During 2006 this strategy improved Galaxy’s fourth quarter results to its second most profitable quarter of the year. Galaxy continues to look for new products including those which could improve its seasonal variations. In 2007, Galaxy will be introducing a new line of beverage coolers and desk clocks with sport themes including baseball, soccer and basketball.

Pet Supplies

      The company operates in the pet supplies segment through two subsidiaries. The Warren Pet (“Warren”) division of the company’s Boss Manufacturing Holdings, Inc. subsidiary imports markets and distributes a comprehensive line of non-food pet supplies to various retail outlets. Products in this line include dog and cat toys, collars and leads, chains and rawhide products. Warren markets its product line primarily to discount and hardware retailers utilizing a network of regional distributors. Boss Pet Products, Inc. imports, markets and distributes pet cable restraints, shampoos and other pet chemical products. Boss Pet markets its products primarily to pet supply specialty retailers under the Prestige brand name. In addition, Boss Pet sells products to discount retailers under various privately labeled brand names.  Sales in the pet supplies segment have historically exhibited seasonal fluctuations. Spring and summer months tend to generate higher sales at retail as consumers spend time outdoors with their pets during warm weather months. Cold weather months generally produce lower sales at retail. Because of this seasonality, pet supply sales tend to be higher in the Company’s first and second quarters, with sales declining through the third and fourth quarters, which again complements the glove business.

 

Recent Performance

 

As you can see from the chart below, over the past few years there has been respectable growth in operating income with a strong contribution from the promotional business. In addition, the promotional business has demonstrated an excellent and consistent operating margin.

Operating Income (In Million)
		200 6						2 005						200 4
Operating Income (Loss) by Segment  $ (000)		$			%			$			%			$			%
Work Gloves & Protective Wear		1,568			4.2	%		1,002			2.6	%		1,309			4.0	%
Pet Supplies		126			2.0	%		356			5.1	%		211			3.5	%
Promotional & Specialty Products		1,485			14.9	%		1,192			13.0	%		627			14.7	%
Corporate & Other		(976	)		—			(1,029	)		—			(920	)		—
Total Operating Income		2,203			4.1	%		1,521			2.8	%		1,227			2.9	%

 

(Percentages are operating margins)

 

The company’s first quarter 2007 performance came in excellent with an EPS of 6 cents per share versus a loss of 3 cents per share last year. Gross margins improved in both the glove and pet supply business.

 

Diluted earnings for 2006 were $1.72 per share, but these results included a large tax benefit. The company had previously reserved against 100% of its NOL carryforward balance. Recognizing the excellent earnings trend, the company reduced its reserve for its NOL carryforwards by 25% of its $28 million NOL balance. Pre tax earnings were about $.81 per share. Given that the company will not be paying taxes for many years to come, it might be reasonable to value the company on a multiple of pre-tax earnings. On this basis the company is selling for less than ten times last year’s earnings. The company’s free cash flow (Net income plus depreciation and stock based compensation, less the deferred tax benefit and capital expenditures) was about $.92 per share in 2006. The company sells for about 8 times free cash flow.

 

There is no reason, at this point, to expect 2007 earnings not to be an improvement over 2006. The glove business should continue to provide good operating income and the promotional business should experience continued growth.

 

 

Balance Sheet

 

The balance sheet is essentially “bullet proof”.  The company has net working capital of about $8.15 per share (fully diluted for options and excluding deferred taxes), which is not bad for a company selling for about $7.50 per share! The current ratio is about 8:1 and the company has about $2.4 million of long term obligations versus a tangible book value of over $22 million.

 

Management

 

Management runs this company for the benefit of shareholders, which makes sense given that they own 72% of the shares outstanding. They pay themselves very reasonable salaries and appear to be focused on building the value of the company. Their strategic moves have been intelligent and very successful over the past few years. Their acquisition of the promotional business has not only been a natural complement to the glove business but has introduced significant growth and improved margins to a stogy old glove company.

 

The obvious negative is that given that management owns 72% of the company, the liquidity of the shares is poor. Buying a position requires time and significant patience.

 

Concerns

 

 

1) The shares have limited liquidity.

2) Management has control and may not be sensitive to the concerns of outside shareholders.

3) The pet accessory business has not been a great performer and requires more focus to improve profitability.

4) The company may decide to “go dark” and deregister its shares.

 

 

The Bottom Line:

 

Boss is a significantly undervalued stock with its shares selling for less than net current assets and at about eight times last year’s free cash flow. The company has effectively diversified it business over the past few years and can be expected to continue to grow its earnings. The company is in a simple and easily understood business that does not require a molecular biologist to run. What more could a value investor ask for?  (A little more liquidity in the stock would be nice, but no situation is perfect!)

 

Catalyst

1) Simple market recognition of the undervaluation of the shares.
2) Management decides to take the company private. (A task which could be easily accomplished given their large ownership stake.)
3) The company implements a dividend.