Seeking Alpha: Summer Infant's Recovery Story Veers Into The Bizarre

Some companies have a knack for snatching defeat from the jaws of victory. While the latest setback to Summer Infant (NASDAQ:SUMR) - a management change brought on by an apparent attempt from prior management to steal trade secrets and form a new company - is not the fault of the business, it represents yet another weird setback in a story that has seen plenty of challenges on its road back.

The resume of Summer Infant's new CEO should bring some confidence, and the company's basic plan of prioritizing new product development and margins seems sound. What's more, and as bizarre as this may sound, I think there's an argument that a new product good enough to steal probably has some above-average potential. A higher risk premium moves my target down a bit, but Summer Infant should arguably trade 50% higher than it does today.

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Summer Infant's Recovery Story Veers Into The Bizarre

Seeking Alpha: Summer Infant Looking To Get Smaller, Smarter, And More Profitable

Picking Summer Infant (SUMR) as a Top Idea in mid-October of 2013 has been a boneheaded move so far, as the stock has declined about 25%. Summer Infant's share price weakness has come in response to greater-than-expected struggles to migrate away from low-margin licensed business and reduce SKU counts.

With new management in place, Summer Infant is continuing its basic strategic decision to slim down and refocus itself around a smaller number of more profitable, more competitive SKUs. This is not an unusual or uncommon phase in prior growth-by-acquisition stories, but the process can be difficult and stretch on longer than investors' patience. Summer Infant has a long way to go before it is a more credible threat to Dorel Industries (OTCPK:DIIBF), Newell Rubbermaid's (NWL) Graco, or Mattel's (MAT) Fisher-Price, but Summer Infant doesn't have to become the best to be better.

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Summer Infant Looking To Get Smaller, Smarter, And More Profitable

Seeking Alpha: Dorel Industries Trying To Ride Out A Flat Tire

Segment-leading brands don't always guarantee top-flight performance, as Canada's Dorel Industries (OTCPK:DIIBF) demonstrates. The stock hasn't been terrible, but it doesn't really stack up so well against the S&P 500 over the last one, two, and five-year periods, even though Dorel boasts significant market share in the infant/child products, bike, and ready-to-assemble furniture markets.

I wish I could see a brighter future for this company, but I have some doubts. I don't think the issues that are currently hitting the bike business are going to last forever, but this isn't a company that has done all that much from an organic growth, operating margin, or return on invested capital perspective over the past decade. The stock does seem a little undervalued today, but I can't get comfortable with the idea that it's really an outstanding performer.

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Dorel Industries Trying To Ride Out A Flat Tire

Seeking Alpha: Summer Infant's Self-Improvement Could Take It A Lot Further

I approach a bullish article on Summer Infant (SUMR) with more than a little trepidation, as I have been burned by writing favorably about this name once before. I previously underestimated the serious operational challenges that the company faced after a series of debt-fueled acquisitions and the resulting missteps with new product introductions, not to mention challenges at major retailers like Toys R Us/Babies R Us and the increasing penetration of private label competition.

Even with the stock up more than 80% over the past year, I do wonder if Summer Infant is back on stronger footing and has further gains ahead of it. Management has elected to discontinue low-margin licensing arrangements, is rationalizing its SKU count, and is broadening its retailer base. What's more, it would seem that conservative estimates for revenue and cash flow (not to mention discount rate) still leave appreciation potential in excess of 40% from today's levels. It has to be noted, though, that Summer Infant is a tiny player in the baby care products market and has yet to demonstrate that it can deliver consistent organic revenue growth, let alone attractive margins or cash flow.

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Summer Infant's Self-Improvement Could Take It A Lot Further