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Distressed Deep Discount Idea: Stanley Furniture Company

January 03, 2011 | About:
Stanley Furniture Company (STLY) current price $3.11

Market Capitalization = 32.17 Million

Enterprise Value = 60. Million

In the intelligent investor Ben Graham wrote “A sufficiently low price can turn a security of mediocre quality into a sound investment opportunity.” I believe STLY may be a candidate for this category.

In 2005 STLY had an average enterprise value of ~ $24 per share versus the current per share enterprise value of $5.82.The current book value is 5.61 with the price to book and price to sales trading at historical discounts. The book value is strongly supported by property and buildings purchased many years ago and sitting on the books below market value.

This mean reversion candidate has been hit hard with the housing downturn but still sits on strong balance sheet supported by cash per share of $1.63 and prior 12 months annual revenues of 14.43 million.2007 total liabilites have been reduced and share count was reduced compared to the TTM during this difficult period.

The details I provided are sparse but have been closely reviewed to justify the post. For 2011 my goal is to provide a continuous stream of value based ideas and at times the details will be limited. Hopefully the information will be useful in managing and developing your investment portfolio.

Shadowstock

http://shadowstock.blogspot.com/

About the author:

Shadowstock
StreetAuthority, LLC is a research-intensive financial publishing firm that aims to level the playing field for small investors by giving them access to the ideas and insights of some of the country's top investment researchers, analysts and writers. Although we specialize in income and international investment research, we publish a wide variety of newsletters that are geared towards helping EVERY kind of investor profit from today's volatile marketplace. Visit StreetAuthority.

Visit Shadowstock's Website


Rating: 3.8/5 (21 votes)

Comments

hongquan7389
Hongquan7389 - 3 years ago
Hi Shadowstock, thank you very much for posting this interesting idea. Can you let me know the household income level of the market Stanley target?
jhodges72
Jhodges72 - 3 years ago
Although you've presented a good idea, I don't believe it qualifies as a value investment. The company pays more in supplier & employee fees than it event generates in sales. The decline in property values aren't the problem. The rapidly decreasing sales and inventory buildup is the problem. They need a catalyst. That's not to say their stock won't appreciate in per share price, just means the downside risk is obvious here.
shadowstock
Shadowstock premium member - 3 years ago
Thanks!


The furniture is high end and the +20% ROIC in 05 and 06 would support this comment coupled with +20% gross margins during this period.

shadowstock
Shadowstock premium member - 3 years ago


Yes the company is distressed. But I believe the idea has some merit in this market that has seen most stocks move near their 1 year high. The company has a long history and management realizes they must get their act together.

“The successful completion of our rights offering announced last week, together with the equipment sale and our progress with the previously announced restructuring program, allows us to eliminate our outstanding debt and the associated $1.2 million of annual interest expense,”

Prepaid 15 million in debt and the Company indicated that cash on hand after the debt prepayment was approximately $19 million. Improving cash conversion cycle, owned Real Estate on the books below market value

Clean shareholder friendly capital structure with reduced share count from 2006. Historically cheap value based on sales and book value. Mean reversion candidate

Thanks

John

jhodges72
Jhodges72 - 3 years ago
20% gross margin during this period? Maybe we're looking at two different financial statements. I'm not seeing a 20% gross margin. I'm seeing a net loss of ($4.93 Million) for the most recent quarter and a net loss of ($35.47 Million) for the last 9 months. Remove the $9.07 Million goodwill impairment charge and they've still lost ($26.40 Million) for the last 9-months; unless I'm looking at the wrong company.
blindboygrunt
Blindboygrunt - 3 years ago
Jhodges72 -- The period referred to was '05 and '06, when gross margins were north of 20%.

Not sure how relevant margins are from 4 or 5 years ago, but what Shadowstock was saying is correct.

In any event, you are commenting on net margins. Gross margins were ($8.17 million) for the last 9 months.
jhodges72
Jhodges72 - 3 years ago
Seems like you're right. I got confused when he stated "coupled with +20% gross margins for this period". Wasn't sure exactly which "period" he was referring to. Quarterly or 9-month. Either one of them didn't produce a +20% gross margin as they were both negative. In any event, as a value investor - "gross margins" mean very little to me as expenses are very real events.
Dan Dellegrotti
Dan Dellegrotti premium member - 3 years ago
Although Shadowstock leaves much to be desired in terms of making the argument that STLY is an undervalued investment, he did have pretty nice timing.

[url=http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Linear&chdeh=1&chfdeh=1&chdet=1294206648653&chddm=2437&chls=IntervalBasedLine&q=NASDAQ:STLY&ntsp=0][/url]
batbeer2
Batbeer2 premium member - 3 years ago
Hi Jhodges72

In any event, as a value investor - "gross margins" mean very little to me as expenses are very real events.

Hmm....

You may not consider me a value investor but IMO gross margin just as important as net margin. The only reason a company has superior gross margin is because it has the competitive advantage. It can outprice its competitors... or spend more on advertising..... or spend more on R&D.... etc.

The cause for superior net margin is not as clear.

shadowstock
Shadowstock premium member - 3 years ago


Sorry for the confusion on the Gross Margins. I’m definitely not making a case for margins but the case for their customer base being higher end.

STLY is just one idea with potential based on ideas such as mean reversion, debt reduction, share count stability, high ROIC when the industry was stronger, cash, real estate, long business history, strong relative valuation to industry peers or its historical performance using measure such as price to sales or book, restructuring catalyst, improving economy, and a balance sheet that is strong enough to help navigate further weak operational results.

Good Luck to all

John

jhodges72
Jhodges72 - 3 years ago
"You may not consider me a value investor but IMO gross margin just as important as net margin. The only reason a company has superior gross margin is because it has the competitive advantage. It can outprice its competitors... or spend more on advertising..... or spend more on R&D.... etc.

The cause for superior net margin is not as clear. "
I don't have an opinion regarding your approach to investing because I don't know you. However, while I believe it's true that a company that possesses a competitive advantage is one that can out-price competition, afford more in R&D and Advertising, I don't believe the actually gross margin is the place to look for that competitive advantage. It's a place, for me, to take a glance at for screening purposes. I believe a competitive advantage is more easily recognized, #1 - on the financial statement text, because if you don't know specifically what that competitive advantage is - numbers can fool you into thinking one exists. #2 the cash return on invested capital and the incremental earnings power of the business which have to do with the net figure. How much per $1 of invested capital the company can produce that affects the earnings to the shareholder. When the earnings power value of the business exceed, by a large degree, the asset value of the firm - a moat exists. Buffet warns against using EBITDA and Pro Forma calculations. I believe earnings power is the single most important tool to finding out if a moat exists, and the single most important tool deciding if a competitive advantage exists is by reading the financial statement. To each his own.
lttzz
Lttzz - 3 years ago
The analysis didn't include recently issued shares so the market value calculation is off.

Book value backed by property and buildings is debatable. Google mapping the properties will tell you they are not in hot area. I doubt if they can get that much money if the business is folded today. As a matter of fact they've been accelerating depreciation. But the management seems to be honest about what's going on, write-downs/accelerated depreciation etc. and proactively managing, consolidation/layoffs etc. Sales are falling down at a slower rate. Chairman/CEO fully participated right offer to inject fresh capital and the company may get $32 million settlement. Interesting situation, I will keep watching.

kfh227
Kfh227 premium member - 3 years ago


http://www.gurufocus.com/StockBuy.php?symbol=stly&rec=1

Third Avenue Management owns 25% (Bought for around $7)

Ronald Muhlenkamp owns 5% (Bought 9 years ago for alot and has done noting but reduced since)

The 3rd Avenue mangemnt buy could be the one to watch. Looks like Ronald doesn't know what he is doing.

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