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A “Hidden” Net-Net Stock — Hooker Furniture (HOFT)

July 08, 2011 | About:
whopper investments

whopper investments

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Hooker Furniture (HOFT) is a home furnishing company that ranks as one of the fifteen largest publicly traded home furnishing companies. Despite a rock solid balance sheet consisting of $20 million in cash against no debt and over $123 million in tangible equity and a history of profitability (the company has turned an operating profit in each of the past 11 years), the company trades for a market cap of ~$97 million. In many ways, it’s like LAKE (another holding of mine), though it doesn’t have quite as good a history of solid ROIC.

But all of those characteristics, while nice, are just a first glance. Once you dig a bit further into the company, I think they start to get really interesting.

Let’s first talk qualitatively, and then get to the quantitative stuff (which is where I think they get super interesting).

Qualitatively, the company makes furniture. This is a notoriously cyclical business dependent almost completely on new housing, and the past three years have probably been the worst three years for housing in history. The fact the company has managed to maintain profitability and even keep their dividend throughout the Great Recession is super impressive and speaks volumes to management’s ability. The company believes they continue to gain market share, and while margins are currently being pressured by a still dismal economy and fierce competition, it’s not hard to imagine earnings exploding if the housing market ever turns and the economy starts turning.

Quantitatively, the business is extremely over capitalized. They have $104m in current assets versus just $22m in total liabilities for a net current asset value of $82 million. Now, you’re probably wondering why I called Hooker a “hidden” net net stock.

Simple.

The company accounts for it’s inventory using LIFO (last in, first out). Basically, this allows Hooker to overstate expenses and understate inventory, which allows them to reduce their tax payments but also reduces earnings and thus book value. If you adjust for their huge LIFO reserve, Hooker would have $119m in current assets and net current assets of $97m… slightly above today’s stock price!!!!

And it’s not like this is a business that deserves to trade for a discount to book value. Trailing return on capital (if defined as Ebit / tangible assets) comes in at barely under 4%… very low, true, but not unreasonable given this is a business at a cyclical low. If you average the past 11 years of returns on capital, the business has averaged over 13% ROC. That’s a business worthy of trading for at least book value, if not a slight premium.

A couple of other nifty facts. From Feburary 2007 to August 2008, the company repurchased $50 million worth of shares. While the timing and price can be argued in light of the the subsequent economy and their current stock price,what can’t be argued is Hooker funded a huge repurchase program while maintaining a nice dividend. Management is focused on increasing shareholder value and returning cash to shareholders. That’s rare, and in a net net stock that’s quite possibly the best characteristic a stock could have.

Ok- to sum it all up (because I know this post has been a bit disjointed!!! Sorry, I’m writing without my notes)- Hooker trades for a significant discount to tangible equity and, after adjusting for its LIFO reserve, trades at a slight discount to net assets. I hate the saying you’re getting “paid to wait” (dividend policy really should have no effect on stock prices), but the company is currently yielding almost 5%. After listening to the conference calls, you can tell management is much more concerned with when they can raise the dividend or (to a lessor extent) buyback stock… it doesn’t seem like a dividend cut ever crosses their mind. So at these prices, you can be paid 5% while you wait for the business to turn around and Mr. Market to realize he’s giving away a decent business with strong management for a ridiculous price.

Disclosure: long HOFT and LAKE


Rating: 3.5/5 (15 votes)

Comments

patrickmckoon
Patrickmckoon - 2 years ago
Great post! I believe insiders purchased some shares in the past year as well. I have no position in $HOFT
The Science of Hitting
The Science of Hitting premium member - 2 years ago
Look at all that inventory though... at the end of the year, almost all of inventory was finished goods; as they noted on the call, they were forced to discount product in the quarter to avoid overstock. Do you have any thoughts on this account? Good article; thanks
DocMoney
DocMoney - 2 years ago
But as a business with no moat, wouldn't it become a buy only when trading at a discount to tangible book, of at least 25-30%?
rajprasad
Rajprasad - 2 years ago
Great post. I researched LAKE which you like. I find one disturbing data. SG&A increased by 15% while revenue is projected to increase by 6%. Any thought why SG&A increased by 15% and is it going to level out in future
jhodges72
Jhodges72 - 2 years ago
Inventory imbalance = value trap.

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