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Stanley (STLY) - Catalyst Eminent?

July 17, 2012 | About:
whopper investments

whopper investments

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This is going to be a quick post, as the idea is somewhat time sensitive given they report results tonight.

A while back, I mentioned Stanley Furniture as a potential net-net with a hard catalyst. The catalyst was winning CDSOA funding of $40-48m, of ~$3 per share.

Well, low and behold, this little gem was buried in their most recent 10-Q

On March 5, 2012, the Federal Circuit denied the motions for injunction, “without prejudicing the ultimate disposition of these cases.” As a result, we expect to receive a CDSOA distribution of approximately $40 million by the end of April 2012, based on our allocation of the CDSOA funds distributed in each of the past six years. If the Federal Circuit were to reverse the decisions of the Court of International Trade and to determine that the Non-Supporting Producers were entitled to CDSOA distributions, it is possible that Customs may seek to have us return all or a portion of our company’s share of the Holdback. Based on what we know today, we believe it is a remote possibility this will occur.

Since March 31, 2012, we have received $9.5 million in distributions and we expect to receive the remaining $30.5 million by the end of April, 2012. The entire $40 million in distributions will be recorded as income in the second quarter and subject to income taxes but our current net operating loss carryforwards should be sufficient to offset a majority of this taxable income.
Stanley reports results tonight. So their report will include a $40m gain tax free. Adjusting their most recent balance sheet for the gain, the company will have $50m in net cash and a book value of ~$95m, versus a current market cap of $60m.

So the company has a lot going for it. It’ll have a huge cash balance and should continue receiving $8-10m per year in CDSOA distributions. With a market cap of $60m and an EV of $10m, that’s insanely cheap, right?

I think so, yes…. but I am staying away from it right now.

Why?

Basically, this chart (click to enlarge)



Recent results have been horrific. The company’s business has been burning through all of the profits CDSOA has been providing them and then some. True, the 2011 results + most recent quarterly results make it look like the business is finally bottoming out, but if there are any changes to the CDSOA payments going forward…. the business is looking at a long string of crippling losses going forward. And keep in mind the CDSOA payments are based on market share, so if STLY continues to lose market share, their CDSOA payments will go down as their losses increase!

Of course, there is the potential for upside- if the business can start hitting 2007 results again, you’re easily looking at a mid-teens handle on the stock price.

However, I think the thing that really is keeping me away from Stanley is this question:

What are they going to do w/ all that cash?

There’s no doubt Stanley is in turn-around mode right now. And turn-arounds love to consume cash. If you give them a dollar, they will find some investment or capex to put it towards.

But shareholders would probably prefer that Stanley distribute some of that cash to them, not go reinvest it all into a potentially declining business at possibily horrific rates of returns.

Unfortunately, Stanley’s managers interests are probably not in line with shareholders. Their equity ownership of STLY is pretty much a token amount, and they were willing to dilute the hell out of shareholders in 2010. Those really aren’t characteristics I like to see in a potential investment.

So ultimately, Stanley’s a very interesting investment. I’ll be eagerly following their results tonight, and I really couldn’t blame you for making an investment. I bet there are really good odds of it turning out quite well for you. But, ultimately, at these prices and with these managers, the company isn’t quite right for me.


Rating: 4.6/5 (5 votes)

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