First, I’d encourage you to go check out this great write up by my friend Mason over on gannononinvesting. It covers most, if not all, of the points I’m going to cover here, so definitely check it out!
Anyway, Stanley creates wood furniture. They offer products for adults under their name, Stanley Furniture, and for children under the Young America brand name.
In an interesting turn, Stanley is off shoring the production of their adult line while moving the production of the Young America brand line back to America. A kind of strange decision, but management believes it’s the right move for both brands. HOFT underwent decided to begin off shoring in the middle of the decade, and I believe that the decision is what allowed them to stay profitable and maintain solid return on capital ratios throughout the recession. The simple fact is off shoring production is just so much cheaper in the furniture business that you need to have some very good reasons to not do it. I believe HOFT will see some huge increases in ROIC once the housing market begins to turn around, and as STLY continues to offshore, they could be looking at some big increases in ROIC as well.
But, honestly, an investment in STLY isn’t going to be based on any qualitative characteristics. It’s going to be based on a pure asset basis, with a possible turnaround in the business serving as a free option.
At their most recent 10-Q, Stanley had tangible book value of $4.00 per share, net current asset value (current assets minus all liabilities) of $2.70 per share, and net cash (their cash minus all debt (they have no debt) of $1.67 per share. Versus their current stock price of ~$3.43, those metrics make them interesting, but by no means a screaming buy. Especially when you consider that the company is losing significant amounts of money and has done so for several years, those valuations don’t look especially compelling.
But if you dig through the financial statements, you’ll find something really interesting. The company is getting payments from the Continued Dumping and Subsidy Offset Act (CDSOA). Basically, this act reimburses domestic wooden furniture manufacturers for a glut of cheap wooden furniture coming in from China.
In the past three years, STLY has gotten $1.6m, $9.3m, and $11.5m from this act, plus they’ve received a bit over $1.1m in the first half of this year. Per the companies most recent 10-Q, STLY believes they could receive an additional $40m as the government liquidates their $152m CDSOA fund that has been held back because of litigation that is slowly being resolved. Plus, the company believes there is an additional $2m to $8m that could be distributed to them depending on a couple of other issues being resolved.
Read that paragraph again. Go ahead. I’ll wait for you… In total, they are projecting potential payments anywhere from $40m to $48m, or $2.79 to $3.35 per share. On the high end, that’s basically their current stock price! These potential payments don’t appear anywhere on their balance sheet (you can read up about them on page 9 of their 10-Q or page 17 of their 10-K).
What’s the likely hood of them receiving these funds? I honestly don’t know; I’m not an expert in this area. But their filings seem pretty optimistic, and management also seems optimistic when asked about it in conference calls. If I had to guess, I’d say the odds are better than 50/50, but to be conservative, I’d say their odds are between 1 in 3 and 50/50.
Currently, I’m staying away from STLY. I like their upside potential from the CDSOA payment, and ignoring those payments, the company seems relatively fairly valued on an asset basis. Normally, this is a situation I’d get pretty excited for- heads I win, tails I break even. However, their operations are losing a lot of money, and it’s really tough to see that turning around. It wouldn’t surprise me to see them continue to lose enough money to burn through a huge amount of their assets, and I just don’t think your picking up their current assets at a big enough discount to give a large margin of safety.
My opinion would change, of course, if you thought the CDSOA payment was within your circle and you could accurately identify the odds and potential timing of them receiving the CDSOA payments. In that case, you could have a huge margin of safety at today’s price.
STLY would be a nice pick up as part of a diversified basket of cheap stocks with hard catalysts. But for now, I’m staying away.
Disclosure- Long HOFT