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Stanley - 'Here’s Another Fine Mess…'

April 29, 2014 | About:
David Chulak

David Chulak

29 followers

For those of you old enough to remember the films and antics of the comedic duo of Stanley Laurel and Oliver Hardy, the catchphrase most associated with them is Oliver telling Stanley, “Well this is another fine mess you got me into.”

Those investors that have sought value with Stanley (STLY), believing this stock selling below book value might enrich them may now be thinking the very same. This is a fine mess that you are in.

Supreme Court Justice Potter Stewart uttered his famous quote in 1964, “I shall not today attempt to define the kinds of materials I understand to be embraced within that shorthand description (hardcore pornography); and perhaps I could never succeed in intelligibly doing so. But I know it when I see it." (Emphasis mine.)

While we may have differing views or definitions of a stock that has a moat, either narrow or wide, I know that Stanley (STLY) doesn’t have one. Whether you are trying to discover a moat with high switching costs, intangible assets that set them apart, some sort of cost advantage or size advantage or even high return on invested capital, you will not find a way to include Stanley (STLY) as a stock with any sort of moat. A great product does not necessarily give a company a competitive advantage if it can be easily duplicated. Names can sometimes set a company apart, but Stanley’s name, as nice as it is, doesn’t create any sort of moat.

Recently, there have been many articles suggesting Stanley (STLY) is a cheap stock that has fallen upon hard times and may be of value in your portfolio. It should be noted that the following gurus do hold positions in the stock:

John Rogers (Trades, Portfolio)

Third Avenue Management (Trades, Portfolio)

Chuck Royce (Trades, Portfolio)

Martin Whitman (Trades, Portfolio)

Donald Smith (Trades, Portfolio)

Below are some reasons for staying away from this stock:

  • The auditor’s report by PricewaterhouseCoopers LLP from the 2013 Annual Report is disturbing. The report appears a little longer than many which causes you to read carefully. In particular, the auditors state in the report, “…in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting…” They go on to explain that “A material weakness is a deficiency or a combination of deficiencies….such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis”. In other words, there is a reasonable possibility that the records are not accurate, but due to time constraints and lack of controls by management, we are in essence washing our hands and calling it good enough.
  • The 2013 Annual Report’s Shareholder’s Letter by President and Chief Executive Officer (CEO) Glenn Prillaman, was a tough read for anyone holding the stock. Prillaman states that it was another bad year but they had received some $40 million due to the Continued Dumping Subsidy Act, a regulatory act which appears to be the only thing that has allowed the company to continue. He states, “...the company could have chosen to liquidate and give the proceeds to shareholders”. Instead, the company decided to make wholesale changes and try to restructure themselves for a new start. The fact that he is acknowledging liquidation as a possibility is a strong indication of just how bad things have become.
  • Looking back at the reporting of operation results, the following is noted.

At the second quarter report, 2013 President and CEO Prillaman claims that they have completed the initiatives they had started for the restructuring of the company and that “the distractions are behind us” and “that our strategic changes are now in the rear view mirror.” By the fourth quarter, he reminds us again that retail activity has remained weaker than they believed, but “…the capital expenditures associated with restructuring…are far behind us.” In fact, revenue is still declining, gross margins continue to decline, return on invested capital continues to worsen and free cash flow continues to flow red. One bright spot is the lack of long-term debt by the company, which is zero.

  • Competition will continue to be a drag for Stanley. In the annual report, it is stated, “The furniture industry is highly competitive and includes a large number of competitors, none of which dominate the market. In addition, competition has significantly increased as the industry’s worldwide manufacturing capacity remains relatively underutilized due to lack of demand driven by the ongoing economic downturn and its impact of domestic housing”. Aside from verifying that this is a no moat industry, this does not bode well for a company with declining margins, a Piotroski F Score of 1 and a housing market that remains highly questionable. Once again, someone must buy the houses. Many hedge funds that had dived into the market have since left. It takes jobs and higher income to drive the housing market before the furniture market can begin to heal. As pointed out before, the employment ratio of people working is not good. This is a picture of the recovery.

  • Stanley has a current ratio of 6.0 and a quick ratio of 2.9, indicating it is sitting on a lot of cash or at least sitting on what it has. While this may indicate that the company can meet its short term obligations, it is burning through it quickly. The problem with these ratios is that the current ratio includes inventory, which based upon the decline in sales, means that it is doubtful that the inventory can be quickly turned into cash. The quick ratio is a much better indication of liquidity, however; account receivables have increased as sales have declined.

Ultimately, it appears that Stanley is a sinking ship without a moat. With low multiples and cheapness, this stock appears to be more of a value trap than one worthy of portfolio consideration. The only catalysts to propel the company forward are an increase in jobs, an increase in income and a huge increase in the housing market. With none of these on the nearby horizon, this stock is a fine mess you should avoid.

No Positions

About the author:

David Chulak
David Chulak is a private investor that uses a value approach to investing in the styles of Graham & Dodd and Warren Buffet. Looks for that margin of safety in an effort to preserve capital and attempts to guard against short term market fluctuations by having clear rules laid down in advance for selling an equity. Likes to visit the company's where his investments are in order to understand the business better.

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