Thesis
Chromcraft Revington (CRC) is selling well below net current asset value. In addition, the company has performed a massive restructuring that has shut down most of their domestic manufacturing and switched to sourcing from cheap foreign manufacturers. This switch should ultimately reduce costs and give them a much more variable cost structure.
What Do They Do?
Chromcraft Revington sells furniture under a variety of brands, including Chromcraft and Peters-Revington. The furniture ranges from chairs to complete bedroom sets. They sell to a variety of customers, including Berkshire’s famous Nebraska Furniture Mart, Aaron’s (AAN), and Rooms To Go.
In 2006, the company began shuttering domestic manufacturing facilities and switching their manufacturing to overseas suppliers in Asia. This resulted in significant recurring asset impairment charges, but the last of them incurred in 2Q 2009. They currently have one domestic manufacturing plant, located in Senatobia, Miss., and the rest of their production comes mainly from China.
Do They Have a Moat?
Not really. They do have some brand name strength; however, I don’t think that amounts to much. Personally, when I go looking for furniture, I just look for the first thing that catches my eye inside my price budget, and I’m sure most people don’t go to stores thinking “I must have a Chromcraft end table.” So I think they are pretty much a commodity business.
Operational Risks?
The company says they are not dependent on any one customer; still, I think the loss of one of the three large customers listed above would hurt.
The biggest risk to the investor is the company’s consistent losses in the past four years and the extremely competitive industry they operate in. Still, much of the losses came from asset writedowns and impairments.
Another big risk comes from the company’s line of credit agreement. The size of the line of credit is based on the company’s accounts receivables and inventories. Currently, they have no borrowings and about $8 million available on the line. However, if the availability drops below $5 million, more stringent covenants will apply, and the company will not be able to meet those covenants. The loss of the line could hurt the company, especially the loss of their ability to use letters of credit.
Valuation
By my calculations, the company has a book BV/S of $6.78. Of this, they have net current assets (current assets minus all liabilities) of $4.87. So right now, the company is trading for just above half of asset value. In addition, the company owns a warehouse in Delphi, IN with 519,000 square feet of space and a manufacturing facility in Senatobia, MS with 560,000 square feet of space. With the company’s market cap under $12 million, owning over 1 million square feet of space in addition to current assets worth more than their market cap is a pretty attractive proposition.
Catalyst
On their balance sheet, they have a “refundable income tax” line of over $6.5 million. This line came from the government allowing companies to retroactively apply operating losses to taxes paid over the past five years. The company notes they received the money from the government in January. So the next time the company reports, their cash balance will increase $6.5 million. The increase will substantially decrease their EV, which could draw some interest from value investors and value screens.
Additionally, the reason they made got such a huge tax refund is because this company used to be extremely profitable. In 2003, 2004, and 2005, they earned $1.92, $1.82, and $1.66 per share, respectively. While the world has changed since then, and the company has certainly changed with their shift to mainly sourcing instead of production, the company does still have their main production facility in Mississippi. They have drastically cut costs, and they note in their 10k that they are not utilizing all of their productive capacity. As the economy recovers and sales increase, they should be able to begin utilizing more of their productive capacity, and this should result in a significant improvement in earnings due to leveraging of fixed costs.
Finally, in addition to all of the asset write down charges going away, the company changed their entire management team in 2008, most likely because of how the old team had ignored the shift to foreign manufacturing. This resulted in about $1.2 million in severance charges over the past two years. The good news is, these charges are over and the new management team is focused on returning the company to profitability. They have streamlined the company and eliminated unprofitable and slow moving items. Free cash flow has returned to positive levels, and the company is on the verge of profitability.
Price Target
I have a price target of $5.83 on the company. I came up with this price by taking the company’ current asset value of $4.87 and adding 50% of the company’s other tangible book value to that. There could be significant upside even from those levels if further evidence of the company’s turnaround being successful starts to show in the company’s results. Still, with the company generating positive cash flows, I don’t see much downside from today’s price level.
Disclosure: Author long CRC
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