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Berko: Invacare an exception to axiom

By Malcolm Berko
Published: February 9, 2019, 6:00am

Dear Mr. Berko: About six years ago, you wrote that medical stocks and defense stocks are not so affected by the changes in our country’s economy as mining, beverage, hotel and retail stocks are. So I bought 100 shares of Lockheed Martin at $73 and 200 shares of Invacare a few months later at $28. I have a good profit in Lockheed Martin, which is now about $300, but I’m down $24 with Invacare, which is in the medical equipment business. Should I buy more shares of Invacare at $5 or take my loss and sell my shares? And should I take my profit on Lockheed Martin, which traded at over $360 last year?

— LG, Akron, Ohio

Dear LG: Indeed, I did say that, and I’d say it again if you hadn’t already done so. But that axiom doesn’t apply to every company in the defense and medical businesses, and it’s apparent that Invacare (IVC-$5.10) was one of last year’s 273 (more or less) exceptions that imploded.

IVC’s revenues came in at less than $1 billion in 2018, much less than the $1.4 billion it brought in the year you purchased the stock. The company’s president, CEO and chairman, Matthew Monaghan, has been able to consistently lose money every year since you bought the stock, and I can’t figure out how he does it. The few observers I talked with believe that IVC will lose money in the next year. However, there’s a 72 percent degree of probability IVC will earn 40 cents a share by 2020.

IVC, with its various subsidiaries, designs, manufactures and sells medical equipment and supplies for the home health care and extended care markets around the globe. It makes custom manual wheelchairs and power wheelchairs. All sops are generously paid for by Medicare and Medicaid. IVC also markets, designs and sells such lifestyle products as pressure-relieving overlays and mattress replacement systems. Again, generous commissions are paid by Medicare and Medicaid. IVC designs, manufactures and distributes home care beds and accessories and numerous personal care products. In addition, IVC sells respiratory therapy products, such as stationary oxygen concentrators. And Medicaid and Medicare don’t give a hoot in hell what they shell out.

CEO Monaghan owns 207,000 shares of IVC, while its largest shareholders — Vanguard, BlackRock and Dimensional Fund Advisors — own 11 million shares. One of the few positives that might make IVC attractive to some investors is IVC’s $11.30 book value — meaning that if IVC decided to close its business, liquidate every asset at an almost fair price and eliminate its $240 million debt with the proceeds, there’d be about $11.30 in cash remaining per share to pay off all the shareholders. Ergo, if you bought 1,000 shares of IVC today at $5.10 and management liquidated the company, you’d get back about $11,300. In 2017, the book value was $12.89.

Management tells us that IVC’s poor performance has been caused by high material costs, soft demand overseas (especially in Asia), President Donald Trump’s tariffs, changes in development and consent decrees issued by the Food and Drug Administration. Those reasons for IVC’s failures over the past six years are valid, but IVC’s statements have failed to tell us the primary reason: management. The bumbling bipeds in management stink at what they do. Furthermore, the feeble-minded board of directors has failed to protect the shareholders. Those wankers ought to be tarred and feathered, be sent to the gulag and have their board attendance fees clawed back. Shareholders should consult a law firm about suing the board for failing to protect investors.

IVC is untimely, and I doubt the shares have any recovery potential for at least a year. Sell IVC and take a loss. However, hold on to Lockheed Martin (LMT-$299.33) for a recovery back to the mid-$300s.

Peace isn’t about to break out. War is wonderfully profitable.

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