Sep 25, 2013

$STLY – Has Stanley Furniture Hit Bottom?

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 STLY92513

“If you want to make money in Wall Street, you must have the proper psychological attitude. No one expresses it better than Spinoza the philosopher. Spinoza said, ‘You must look at things in the aspect of eternity.’”  – Benjamin Graham

 

Stanley Furniture is a (STLY) 90-year-old furniture manufacturer located in North Carolina. The company operates in the medium to high-end price points of the children and adult furniture market. It’s children’s brand, Young America is wholly produced at its new facilities in North Carolina. While its Stanley Adult line manufactured in Asia.

At a price of $3.70 per share and a market cap of ~$52 million the market is valuing the firm at 60% of tangible book value. With zero debt and $20 million of cash on the books, its EV is roughly $32 million. The only problem; it hasn’t been profitable since 2008.

I attribute this malaise to two factors. The first being housing and the second the disruption caused by the significant transition the company has been making since 2009.

Housing weakness has obviously had an impact on consumer spending habits, and the furniture industry especially. But this headwind should be abating with the recent pickup in housing activity and may even become an important driver of revenue going forward.

As for the transition, since 2009 the company has made a number of significant changes to its operations. Most notable have been building new production facilities for the Young Americans brand, moving and consolidating its headquarters, and installing a new firm wide Enterprise Resource Planning (ERP) system. All of these changes have disrupted the normal course of business in one-way or another and thereby limited the productivity of the firm.  Further to the disappointment of shareholders, management has consistently proven overly optimistic about the speed and ease with which these important changes would be implemented. As such, it is easy to see how shareholders have thrown up their hands in disgust, causing the stock to retreat from almost $8.00 in 2009 to its current level.

As of Q3 2013, the majority of the changes, including the new factory, headquarters and ERP system have been fully implemented. With all that behind us, the question for investors has become will this new strategy actually work?

Well, the answer is it’s half working. The Stanley adult segment was profitable in 2012 but the Young America brand continues to be a loser. Which is why it should be reassuring for investors that management is considering discontinuing the Young America brand if it fails to achieve profitability. Needless to say, the resulting decision could be an important catalyst.

As for liquidity, the company has $20 million on the books. With an estimated maintenance CapEx of $1.5million and operating losses close to $2.5 million a year, the resulting burn-rate should provide sufficient time to evaluate and adjust the strategy before the company needs to access capital markets. There is also the possibility that the company will receive an addition $4 million from the government as a result of antidumping legislation.

Another appealing aspect of this company is the ownership roster. The CEO currently holds roughly 2.2% of the outstanding shares, as well as restricted stock and options worth an addition 2%. The largest shareholder is Third Avenue Management with Royce & Associates not far behind. All in all, not too shabby.

In sum, STLY appears to be a company emerging from a long and painful transition that is being priced close to liquidation value, and though it is far from assured that the firm will be able to achieve profitability, management seems incentivized as well as willing to consider what is good for shareholders.

 

Disclosure: Long STLY

 

P.S.

You may be wondering what the Benjamin Graham quote at the beginning of this post has to do with an investment like STLY. Well at first I was on the fence about STLY – it’s no sure thing. But then I thought about the relative merit of a portfolio comprised of investments with characteristics like STLY, at which point I realized that STLY is a value investment.

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