Analysts: Charles & Colvard “Acquisition Target”
March 06, 08
Financial services holding company Merriam Curhan Ford & Co (MCF) has upgraded its investment rating of Charles & Colvard, the creators of moissanite, to buy from neutral. In its report, MCF argued that Charles & Colvard “could become an acquisition target based on inventory value alone.”
MCF said, in its view, that “Over the past 12 months, [Charles & Colvard] shares have been hampered by weak retail sales trends caused by a tough consumer spending environment and needed improvement in consumer awareness.
“We downgraded the shares in January 2007 on those very concerns,” the report continued. “However, we believe the current valuation does not account for the potential wholesale value of the company’s manufactured inventory and method patent — making Charles & Colvard a potential acquisition target for a patient company in the jewelry or consumer products industry.”
Charles & Colvard are currently trading around $1.30 per share, between its 52-week range of $1.20 to $7.38 per share. The investment analysis proffered that Charles & Colvard could be bought for between $3 and $5 per share, based on a discount of 75 percent of the potential wholesale value of the inventory on hand.
The company’s share price jumped approximately 18 percent on March 4 – from $1.27 to $1.50 per share, following release of the analysis.
MCF explained that the company has significant inventory value on its balance sheet and that the appropriate was to value the company’s inventory to look at the potential wholesale value to an acquirer.
“Even though the company’s sales trends have suffered in recent quarters, due to its minimum purchase agreement in place with Cree (a silicon carbide manufacturer), Charles & Colvard has built up $43 million in inventory of moissanite stones (based solely on the total manufacturing cost of the stones).
“Considering Charles & Colvard’s 72.6 percent gross margins in fiscal 2007, we estimate this $43 million in inventory could have a wholesale value of more than $157 million — or almost 7 times the company's current market capitalization.”