Investment Note: Culp

The stock has taken an absolute nosedive, down almost 90% since its 2016 high, and also down 55% since the beginning of the year

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May 20, 2020
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Culp Inc. (CULP, Financial) sells mattress and furniture fabrics to mattress and furniture makers. The stock has taken an absolute nosedive, down almost 90% since its 2016 high, and also down 55% since the beginning of the year. With these numbers, it's behaving like a risky, over-levered bit player, but nothing could be further from the truth.

Culp trades for $70 million, with net cash of over $30 million as of its latest quarterly report. Ignoring intangible write-downs/ups, the company has generated operating income of $9 million in the first three quarter of its fiscal year. It is a market leader in North America in selling mattress fabrics to companies like Serta-Simmons and Temper+Sealy. In addition to its manufacturing facilities in North America, Culp makes its products in low-cost jurisdictions such as China, Vietnam and Haiti.

Profits over the last couple of years have been depressed as a result of low-cost imports from China disrupting American mattress sales. Last year, the U.S. imposed anti-dumping duties on these, but there was an inventory build-up in anticipation of these duties, and so the industry has been working that off.

Now the Covid-19 crisis has made things even worse for the company, obviously. Culp has furloughed a bunch of employees as a result, and has shifted some manufacturing towards making masks and gowns.

At the current price, Culp is priced for disaster, but with its strong balance sheet, the company should be able to stick around to when business conditions improve. Furthermore, it expects to be able to compete better with low-cost imports with its own low-cost imports thanks to recent expansions of its low-cost manufacturing facilities.

Fairfax Financial recently added shares of this company as well.

Disclosure: Author has a long position in shares of Culp.