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Flexsteel Industries (Ticker: FLXS) is an Iowa based manufacturer of wooden and upholstered furniture for residential, business and commercial use. Additionally it makes upholstered seating for recreational vehicles such as motor homes, trailers, boats and yachts. Flexsteel wholly owns DMI Furniture Inc of Kentucky.
Flexsteel has a market value of $93 million and the stock currently trades at $13.92/share. The company is solidly profitable although it could be much more profitable when the housing sector revives. The company has no debt and a good amount of cash on hand and recently upped its dividend 33% to 0.4/share per year that equates to an yield of 2.90%. At the current levels, I believe that the market is under pricing the stock.
Flexsteel’s balance sheet is pretty clean so it is quite easy to analyze. There is no long term debt and the company has $17.88 million in cash. The balance sheet has shrunk a little since 2008 but has held pretty steady over the last 3 years. The inventory, receivables and payables are pretty consistent and do not throw up any red flags. Fiscal year end cash levels have actually risen over the last 3 years as well.
The company currently trades at a 27% discount to its book value, on par with its NCAV which ignores the value of its long term assets (plant, property and equipment). Given the fact that the company is profitable and pays a good dividend, it can be easily surmised that the market is valuing the company stock wrong.
Solid earnings, year in and year out – but nothing spectacular. In the trailing 12 months, the company earned $1.5/share which gives it a PE ratio of 9.28. Excluding cash, the PE ratio is 7.5 which gives it a 13.33% earnings yield. A dividend yield of 2.9% is nice too as it aligns the management with the shareholders and keeps them away from taking foolish risks. It is worth noting that the company has paid dividends continuously since 1938.
The company has sufficient liquidity as evidenced by a current ratio of 4.64 and has been working to improve its net profit margin over the last few years of economic downturn. You can see that its current profit margin is now up to 4.14% whereas in the last 4 years it averaged 1.74% (including 2009 when it had a small loss). The company has grown its earnings 25% a year since 2008 while its revenues have declined a net of 16.33%. There are of course limits to how much efficiency it can continue to wring out of its operations.
While the PE ratios in the furniture industry are currently depressed, I think it is quite conservative to value this company at book. Lazyboy is one of the competitors and trades at 1.15 times the book. This gives us a intrinsic value for the company stock as $19.19/share.
Alternatively we can assume that the company will keep its revenues and earnings level for the next 3 years at which point the housing sector would have recovered well enough to give the company a PE ratio of 12. That gives us a 3 year end price of $18 (1.5*12) with $4.5/share earned in the interim. Assuming a 8% required return, the present value of this cash stream is $19.61/share. Not to forget that in this simplistic calculation we have ignored close to $18 million in cash sitting on its books today, which is an additional source of value to the investor ($2.67/share). This gives us a good margin of safety if things do not go as well.
In summary, the stock is a BUY up to $19.19/share with an understanding that some patience will be required to see the expected returns from the stock. Fortunately, there is a good dividend to pay for the wait.