[Member] Bassett (BSET) – Undervalued Balance Sheet – Buy

This is a past Premium recommendation and is made available for your reference. For more past trades, refer to our trade history.

Bassett Furniture Industries (BSET) designs, manufactures and markets home furnishings in the United States. The company operates in three segments:

  • Wholesale – The Wholesale segment engages in the design, manufacture, sourcing, sale, and distribution of furniture products and accessories to a network of 96 Bassett Furniture Direct or Bassett Home Furnishings stores, including independently-owned stores, company-owned retail stores, and partnership licensees; and independent furniture retailers. This segment also involves in wood and upholstery operations.
  • Retail – As of November 27, 2010, the Retail segment operated 54 licensee-owned stores, as well as 47 company-owned and operated stores in Alabama, Arizona, Arkansas, California, Delaware, Florida, Georgia, Illinois, Maryland, Massachusetts, Mississippi, Missouri, New Mexico, New York, North Carolina, South Carolina, Tennessee, Texas, and Virginia.
  • Investments and Real Estate – The Investments and Real Estate segment consists of investments in marketable securities; investment in the Fortress Value Recovery Fund I, LLC; equity investments in Zenith; and retail real estate related to licensee stores. The company recently sold off its equity interest in International Home Furnishings in May 2011.

The furniture industry in the United States is highly competitive, with low margins and has been adversely impacted by cheap imports from China and elsewhere. As such, it is difficult to find and justify investing in a home furnishings company. Still, Bassett has been able to shore up its balance sheet with recent asset sale to a level that renders its stock undervalued at the current prices.

Bassett Balance Sheet

Bassett owned 46.9% of International Home Furnishings, a furniture showroom in High Point, North Carolina, that it sold for a total consideration of $85.5 million on May 2, 2011. This investment was accounted for using equity method since the company did not own a controlling stake in IHFC. The sale resulted in strengthening of Bassett’s balance sheet and it now has $72.04 million in cash and short term investments as of Aug 27, 2011.

The current balance sheet looks like this (summarized):

Balance Sheet Aug-27-2011 May-28-2011 Feb-26-2011 Nov-27-2010 Aug-28-2010
Cash/Equiv 72.04 69.91 6.34 11.07 5.6
AR 16.5 15.65 26.75 31.62 31.67
Current Assets 139.59 135.82 80.35 91.47 88.94
Total Assets 223.72 233.88 181.69 197.32 195.63
           
AP 15.64 16.59 16.3 24.89 23.27
Curr Liab 45.78 53.63 56.6 61.83 60.08
Long Term Debt 4.18 4.22 4.27 4.29 4.34
Long Term Liab 19.3 20.26 26.99 29.18 30.61
Total Liab 65.08 73.89 83.59 91.01 90.69
           
Equity 158.63 159.99 98.1 106.31 104.93

 

You will notice that the cash position improved in the May, 2011 report and as a result the company is much stronger financially now than before.

The stock currently trades at $7.6/share (as of Jan 04, 2012) and with 11.44 million shares outstanding, the market value of the company is $86.94 million. Here are some key balance sheet metrics:

  • Price/Book: 0.57
  • Price/Tangible Book: 0.57
  • Price/NCAV: 1.27
  • Price/Cash: 1.32

Please note that these numbers have been adjusted down by 0.535/share in dividends that the company has paid since the last report as of Aug 27, 2011

I did a rough liquidation value estimation of the company, assuming an orderly liquidation, and arrived at a total value of the company at $118.8 million. This assumes that some AR and Inventory is impaired and it assumes that all debts are paid off $/$. Since the company values its inventory at lower of cost or market, I believe that this intrinsic value calculation is conservative. I assumed a 30% impairment on the inventory, which is not likely to be the case, even if there is a fire sale.

The current price indicates a 27% discount to the intrinsic value of the company. Although it is not a net-net stock, it trades at just 27% premium to Net Current Asset Value, which is not too bad. The long term assets include plant, equipment and real estate that have tangible value.

Is this a Stock For the Long Term?

Answering this question requires us to look at the profit trends, and unfortunately it ties into some of the economic issues that are unpredictable. Sales of branded furniture are quite correlated to the housing market, so until the new home sales improve, the top line will not. Fortunately, demographics and increasing population will eventually drag the housing market out of its current funk. When will that happen? Not easy to forecast.

The company is currently unprofitable, if you eliminate the one time effect of the gain on the asset sale. However, the company has continued to improve its gross margins during the last 3 years as can be seen below:

Profitability ttm (ending Aug, 2011) Nov-27-2010 Nov-28-2009 Nov-29-2008
Gross Margin

49%

48%

44%

40%

Normalized EPS

-0.18

-0.37

-1.55

-3.11

 

If this trend continues, any uptick in new home sales will put the company back in black. Until then, some value destruction is to be expected. Fortunately, the 27% discount to the liquidation value is a sufficient margin to protect against future losses and gives us enough time to adjust if the company continues to experience losses.

Management Actions

Subsequent to the cash infusion due to the asset sales, the management reinstated the quarterly dividends at $0.03/share, and then increased it to $0.035/share. This gives a current yield of 1.8%. The company also issued a special dividend of 0.5/share, paid on Jan 3, 2012 to shareholders on record as of Dec 23, 2011. This does reflect management’s optimism and confidence going forward and investors should be wise to take note of this. On the net, insiders have been purchasing stock in the last 12 month.

Bottom Line

While this stock warrants a close watch in the future, it is an attractive buy at current prices. I recommend a purchase below $8.8/share with a target sale price of $12.45/share. I anticipate a holding period of 2 years or more depending on how quickly the company returns to profit.

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