No. of Recommendations: 1
You're right about the EPS. Meade's earnings are unpredictable. So the question becomes do the accounting earnings accurately reflect the owners' earnings. Consider the following:


1997   1998   1999   2000   2001   2002   2003   2004

47.2   59.9   76.3   126.8   123.0   94.7   110.8   138.3

Gross Profit:

1997   1998   1999   2000   2001   2002   2003   2004

15.3   21.7   32.1   51.0   40.2   24.6   33.9   38.9

Pretax Earnings:

1997   1998   1999   2000   2001   2002   2003   2004

2.3    6.4    9.8    21.0    2.9   (2.3)   2.0   4.2

Neither changes in revenue nor gross profits seem to be the real cause of Meade's earnings fluctuations. Meade's cap ex and R&D have not been evenly spread over this period at all (not necessarily surprising considering Meade's size).


1997   1998   1999   2000   2001   2002   2003   2004

0.6    0.9    1.0    1.4    2.1    2.2    3.0    2.0

Cap Ex:

1997   1998   1999   2000   2001   2002   2003   2004

(0.2)  (2.1)  (2.9)  (1.9)  (2.4)  (0.7)  (0.7)  (0.6)

I've put R&D and Cap Ex together to show how the accounting earnings can be affected by when a company chooses to spend money on some activity that will (in theory) have a long term benefit. Here's the depreciation expense:

Depreciation and Amoritization:

1997   1998   1999   2000   2001   2002   2003   2004

0.7    0.5    0.8    1.3    2.0    2.1    2.2    2.4

Judging by what we've seen above Meade's free cash flow may be deceptively high:

Cash from Operations:

1997   1998   1999   2000   2001   2002   2003   2004

(2.2)   5.5   1.3    8.5   (10.7)   13.4   10.0   9.1

Meade's average cap ex over the past 8 years is about 1.44. If you were to deduct that from the cash from operations number (shown above) you'd end up with a pretty big free cash flow number. But would such a number be reliable? It depends on the answer to a few more questions:

Has Meade been spending too little on cap ex over the past few years (02 - 04). Or, was it spending too much earlier (98 - 01)?

Is Meade now spending more than it should be on R&D or was it spending too little in the late 90s? (Management's disclosure in a recent annual report kind of suggested Meade's R&D spending higher than necessary).

Does Meade really need a higher level of inventory and receivables as part of its business; or, is there actually some real free cash flow here?

Accounts Receivable:

1997   1998   1999   2000   2001   2002   2003   2004

4.8    6.0   10.9   8.5   10.3   12.2   22.4   22.5

Latest Quarter: 44.0


1997   1998   1999   2000   2001   2002   2003   2004

12.1   11.9   14.2   34.3   41.7   29.8   40.1   39.8

Latest Quarter: 49.7

Meade's current liabilities have not increased at nearly the same rate. Here I should mention that Meade made an accquisition which may account for a significant portion of Meade's current assets. It was a very large accquisition relative to Meade's market cap.

I think you're right in that I'm not convinced Meade can be counted on to earn meaningful returns on invested capital.

I'm sure you noticed why I brought up this stock. For the latest quarter the sum of Meade's cash, receivables, and inventories was 94.6. Total liabilities were 45.3. So the excess of current assets (excl. other current assets) over total liabilities was 49.3. Meade's market cap was around $58 million the last time I checked.

Meade sells some very expensive products and also some very cheap products. Therefore, what it sells may be at least as important as how much it sells in dollars.

I'm not confident Meade will earn meaningful returns on capital in the future, because quite frankly I'm not confident that over the past few year it has been generating any real earnings that don't have to be retained in the business.

Still I thought I might bring this stock to your attention because there are so few stocks in this market that would even allow a Graham disciple the opportunity to think about Net Current Assets. Of course, for Meade's stock to be underpriced at these levels, the company's assets would actually have to earn something going forward.

If someone has an opinion on whether Meade will have any real earnings in the future I'd love to hear it, because I haven't a clue at this point.

By the way, Meade rescheduled its earnings release moving it back one week. The company looks ready to report a net loss.

Thanks for your take.

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