Description

Komelon has a pretty nice small business making tape-measures.  The business has attractive economics and potential for market share gains. 

This idea is super simple: the valuation is pretty wild and I think the business will grow.

But before 90% of you stop reading about this small-cap Korean widget maker – remember this: Komelon makes great tape measures so ask for them by name at your local hardware store!  Whether you’re working on a home project, need a stocking stuffer, or are simply looking for the perfect anniversary gift – Komelon has you covered.  At only $10 per 25’ tape - you can’t afford not to buy a couple dozen.

Komelon has ~8.3m shares outstanding - coincidentally very close to the annual number of tape measures they sell. 

Each share (~$7.8 USD) thus illustratively sells one tape measure per year (with pre-tax profit of $1.4/unit).  I think the classic value metric of “Tape Measures Sold / Share” will increase – both from a growing numerator and a shrinking denominator.

Komelon also has ~$10 USD/share in net cash and financial assets.  I think that metric will also grow (again – numerator and denominator).

The company has bought back almost ~10% of its float in the last 2 years.  Repurchases here are mind-blowingly accretive (grows both earnings and net cash per share).  I’ve heard the controlling shareholder understands that math and is a sharp/fine guy.

I’ll leave the precise valuation math up to you, but unless you pick wild variables I think the below is a true equation:

($10/share)*(X% discount) + ($1.4/share)*(Y multiple) > $7.8

If the business is worth ~9x pre-tax, perhaps the fair value might be ~$22/share.

So very cheap Korean widget company – big whoop.  Anything exciting happening?  Actually - kind of! 

Komelon dominates their domestic market (~60% share), but in the tape measure big-leagues (United States) they’re a distant third (trailing Stanley and Lufkin).  I think they’ve got an opportunity to grow their U.S. market share at an attractive clip.

Most tapes are sold through large retailers (Home Depot, Lowes, Walmart) or small stores (ACE, True Value, etc.).  Komelon has weak distribution power relative to Stanley and Apex - who’ve got important tool brands across categories.  Despite this, Komelon has managed to grow their U.S. business over time.

Amazon is the increasingly relevant distribution channel for simple CPG purchases –somewhat leveling the playing field between brand houses with distribution power (such as Stanley) and a category specialist like Komelon. 

Perhaps take a moment right now to shop for a tape on Amazon and see which one you’d choose.

Komelon’s products are very well reviewed and popular on Amazon.  A search for best-sellers indicates they’ve got the top products in the category (versus their 3rd place market share in the U.S.).

Late October

Late November

I’ll vouch that Komelon tape measures are high quality (especially the green one).  The company is effectively founder-run, focuses on the category, and is vertically integrated (through the rolling mill to control steel quality). 

I’d bet more tape-measures are sold online in the future and that purchase decisions are increasingly driven by consumer reviews and fair prices – giving Komelon scope to grow its total share in the “large” U.S. market (and/or conceivably charge an extra ~$0.25-$0.50 per tape)

In summary, Komelon shares seem appealing based on the confluence of:

• Understandable, high margin, extremely well reviewed, limited-disruption-risk CPG business
• Meaningful upside to a non-silly valuation or positive developments
• Likely beneficiary of e-commerce trends
• CEO has engaged in share buybacks at very accretive levels

Risks: Among others - the world probably wouldn’t miss Komelon if it disappeared tomorrow.

Disclosure: Have ownership interest in Komelon Corporation at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of Komelon Corporation without notice for any reason at any time.

Catalyst

TBD