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Bassett Is a Perfect Target for Activist Investors
Posted by: Victor Selva (IP Logged)
Date: March 14, 2014 04:55PM
According to GuruFocus Real Time Picks, on March 11, Mario Gabelli (Trades, Portfolio), the Chairman and Chief Executive Officer of GAMCO Investors Inc. added Bassett Furniture Industries, Inc. (BSET) at an average price of $15.75 and currently holds 442,425 shares of the stock, worth 0.01% of his portfolio.
So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity in the Home Furnishings sub-industry where sales will rise in 2014, driven by the rebound in the U.S.
Strong Brand Name
Bassett Furniture Industries is a manufacturer, importer and retailer of home furnishings. The company’s products are sold primarily through a network (93 company- and licensee-owned stores) of owned branded stores under the Bassett Home Furnishings name, with additional distribution through other wholesale channels including multi-line furniture stores, specialty stores and mass merchants.
The company´s strategy is to differentiate itself on the basis of quality and its retail store program. A successful retail strategy includes custom-built furniture that is ready for delivery in 30 days to customers' homes. Bassett has shifted its mix through the years to a 50/50 retail versus wholesale, with 55 locations but licensed just 34, totalizing 89 stores. The company plans to open five new stores and reposition two other outlets. This expansion is expected to be in the first half of 2014.
The company has three segments: Wholesale; Retail - the company-owned Stores; and Investments and Real Estate. There was an improvement in SG&A costs in its retail segment.
Debt-to-equity and cash to debt ratio are low and currently below industry average. This is a signal of successful management of the financial position of the firm and the ability to avoid liquidity problems.
In terms of valuation, the stock sells at a trailing P/E of 33.9x, trading at a premium compared to an average of 19x for the industry. To use another metric, its price-to-book ratio of 1.1x indicates a premium versus the industry average of 1.51x and the price-to-sales ratio of 0.54x is below the industry average of 0.87x. The first two metrics indicate that the stock is relatively overvalued compared to its peers.
Earnings per share (EPS) decreased in a huge amount in the most recent quarter compared to the same quarter a year ago ($0.15 versus $1.55). We include in the next graph the stock price because EPS often lead the stock price movement.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. With an ROE of 3.24%, it is below the industry mean of 7.7%. Another more attractive option in terms of this ratio is Ethan Allen Interiors Inc. (ETH) with an ROE of 9.72%.
Bassett´ revenue growth was positive (8.1% compared to the previous quarter) and I expect this trend to continue as well as the reversal in earnings per share. For this year Wall Street expects an improvement in earnings, to $0.49 from $0.47.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Jim Simons (Trades, Portfolio) and Donald Smith (Trades, Portfolio) have taken long positions in the stock.
Disclosure: Victor Selva holds no position in any stocks mentioned.
Guru Discussed: Donald Smith: Current Portfolio, Stock Picks
Jim Simons: Current Portfolio, Stock Picks
Stocks Discussed: BSET, ETH,