Investment Research Notes - The L.S. Starrett Company (SCX)

I learned of SCX while going through the pink sheets which is where the B shares of this company trade (the A shares are listed on the NYSE). Although I do not plan to invest in SCX, I use this short post to document my notes and reasoning because SCX was a little more interesting than the majority of companies I come across on the pink sheets.  (Note that except for basically voting rights, the B and A shares are identical).

SCX’s products include precision tools, electronic gages, gage blocks, optical and vision measuring equipment, custom engineered granite solutions, tape measures, levels, chalk products, squares, band saw blades, hole saws, hacksaw blades, jig saw blades, reciprocating saw blades, M1® lubricant and precision ground flat stock.  At the current price of $11.57, SCX trades at slightly over 50% of book value, or , after adding back the large LIFO reserve, at 95% of net current assets (Current Assets + LIFO Reserve -  All Liabilities).  SCX also pays a modest dividend - currently yielding 3.3% (TTM). In total over the last 11 years, SCX has paid $5.52 in dividends.

All net-nets have issues and risks investors must come to terms with, and SCX is no exception. The main issue with SCX is that it is not profitable. Over the past 11 years the company has earned - after substituting PP&E additions for depreciation in the earnings calculation - $0.19 per share on average and  $2.10 in total. However, it's not bleeding significant amounts of money either. From a business perspective - the products the company produces strike me as commodity products. To compete in such a landscape the company must transform itself into a low cost producer. SCX has expanded its operations in China however I'm not convinced it has the scale and distribution network to operate profitably in the long term.

The dividend's decline is another item that detracts from the long thesis. Since 2001, it has declined from $0.80 to $0.32. Also, the split share class is cause for some concern. The disproportionate voting rights accorded the B shares prevents potential value extraction by an activist investor.

Overall, the price is not currently attractive enough for me to invest. I will however keep this company on my radar and potentially get interested if it dips to the $8 range.

Disclosure: No position, and no intention of initiating one