Is this rollup on fire, or is it on fire? Lakeland Industries $LAKE

I saw a post on Twitter yesterday, and it sounded like I could have written it. It went something like this:

I pitched this stock last month, the price fell 35%, my apologies to everyone who lost money. I’m still holding, I still think it’s a good company, maybe I am an idiot.

Gee, that really does sound like me.

Well, thank you to everyonehatespoetry for the idea. I think it’s a good company too, and after it’s fallen by 35%, odds are better that it’s closer to the bottom. If it were to fall further, the five year chart looks like there isn’t too much left to fall before it hits strong resistance around $10.25, it currently trades at $13.15.

Lakeland Industries (LAKE) manufactures protective suits for firemen and for industrial chemical workers. They have a CEO that has been on the job for two years, and has pivoted the strategy of the company toward an aggressive rollup. Efficiency gains and profitability from the rollup have not been achieved as quickly as they would have hoped, but they aren’t dead in the water. LAKE has appointed a new COO, implemented several technology and process rationalizations in their acquired companies, and that is where we find them today; are they trash or treasure?

The safety equipment business is interesting in a few ways, there is little need to maintain an inventory, most orders are custom built to fill. The margins are very decent, 40% gross, and if well run, their larger competitor MSA Safety (MSA) has 25% EBITDA margins, although LAKE was at 7% EBITDA margins last quarter. Obviously there is a lot of room for operational improvement left to go.

The market is fragmented, only MSA has about 10% market share, and they are the largest. There are lots of small companies which sell at very reasonable prices, making the market prime for a rollup. The customers are municipal governments, which should be relatively unrelated to economic cycles, which should imply that at some point, if successful, LAKE could trade at a higher multiple than a comparable industrial. MSA Safety (MSA) trades at a price to sales ratio of 3.5x, which is pretty good outside of Silicon Valley. Lake sits at 0.7x price to sales today, but if you look at forward revenue from acquired companies without organic revenue growth, it’s a forward price to sales of around 0.6x.

The rollup is underway, with probably another three acquisitions targeted for within the next 18 months. The upcoming acquisitions are guided to be under $10 million each, and are primarily for geographic expansion. In the last 18 months the acquisitions were more focused on expanding capabilities and product lines.

Due to recent thin margins, there is some question as to whether or not management is up to the task, but there is little question that their incentives are aligned or that they believe they can do the job. Insider buying has been steady and across the board from the CEO, COO, CFO, even the head of human resources is buying in.

The CEO, Jim Jenkins, did successfully accomplish a rollup as the VP of Corporate Development for Transcat (TRNS), a calibration equipment company. They did 9 acquisitions in five years. There should be enough similarity between Transcat and Lakeland to think that Jenkins has a shot at being successful. The stock price of Transcat went from $30 to $120 under that aggressive rollup, although it has since fallen back down to $80. And his insider purchases seem to imply that he thinks he will be successful as well. From 2020 to 2024, under Jenkins, Transcat revenue per share grew 50%, and the price to sales ratio went from 1.15x to 4.0x. Not a bad return for four years. LAKE is off to a bumpier start, but fundamentally the plan still seems sound.

The best kind of rollup is in an industry with large cash flows and low valuations. Since LAKE’s margins are thin at the moment, they can acquire with debt and with dilution. They have been doing both, which is not ideal, but also not terrible if the targets are cheap enough. LAKE recently raised $42 million with a seasoned equity offering which was four times oversubscribed at $22 a share. Where did all that enthusiasm go now that LAKE is at $13.15 a share? It’s amazing how price drives narrative.

This past quarterly earnings report was a bit of a shock to the market, but, the negative news was mostly from a non-cash writedown and asset impairment. Impairing goodwill from acquisitions is a pretty common event, and they are some of my favorite events, because approximately 60% of active traders are algorithms, and twelve months from now, that asset impairment should roll off the trailing twelve month income statement, and that will appear as growth to the algorithms. So this price drop should correct itself in time, assuming the asset impairments are done for a while.

LAKE does have organic growth of around 11% year over year, and inorganic growth of another 23% year over year, but again at the cost of debt and dilution for that part. Still, it’s hard to sneeze at 34% year over year revenue growth. As of last quarter, trailing twelve month revenue was $167 million, up from $124 million the year before. Management is guiding for between $210 and $220 million in revenue for full year 2026, which is still at 25% revenue growth rate, and does not include the three or more acquisitions that are still planned for this upcoming 18 months.

The rest of the negative news from the last quarter is just the time that it takes to find synergies after acquisitions. I won’t go into all the gritty details of management’s search for efficiencies, which software program is being replaced, who is a six sigma blackbelt, etc. If you want to know that stuff, you can listen to the earnings call.

The tariff situation is still full of uncertainty, but LAKE manufactures a lot of things for the domestic US market in the US already. And they can easily shift more production out of Vietnam and into Mexico if necessary. But nobody knows what to do yet, because nobody knows what the ultimate tariff rates will be. Management has guided that 10% tariffs wouldn’t prompt any changes, but higher than that and things would get shuffled around a bit. There is room to shuffle things around a bit, LAKE is already a global company, although with a lot of room to expand internationally.

With management’s current revenue target, they should be somewhere around $22 per share in sales for 2026. The past peak price to sales ratio was 1.55x, but Transcat had never seen a price to sales ratio above 1.15x until the inorganic growth from nine acquisitions convinced the market they were worth 4.0x price to sales. At $13.15 per share, the current price sales ratio is 0.6x, forward looking. Without surpassing past multiples, the price target would be $34. With more acquisitions, if they are done at prices that are accretive to revenue per share, things could be much better. If the market values LAKE similarly to Transcat, things could be better. That would make a $34 price target moderately conservative.

Lakeland Industries (LAKE) $13.15: $34 by the middle of 2027, but don’t sell if the multiple is still expanding.

In honor of everyonehatespoetry, please enjoy this poem about Lakeland courtesy of Artificial Intelligence.

Lakeland’s Dip:
Stock’s down low, took a dive,
Lakeland Industries, still alive.
Protective gear, they make the stuff,
For firefighters, workers, tough enough.

Price got slammed, Q4 was rough,
Goodwill write-off, market’s tough.
But sales jumped high, up forty-nine,
Fire gear’s booming, that’s a sign.

Analysts say “Buy,” they see the spark,
Targets hit twenty-three, or aim for thirty’s mark.
Inventory’s stacked, tariffs they’ll dodge,
Global moves keep costs in lodge.

It’s not a sure thing, risks are real,
But at this price, it’s got appeal.
No frills, no fluff, just take a look,
Lakeland’s dip might be your hook.

You can find everyonehatespoetry’s writeup here:

Lakeland Fire + Safety (NASDAQ: LAKE)