As I said, I am attempting to make progress on the names that I put on my watch list.
While I don’t remember exactly how HOFT wound up on this list, I know it was through a screen I ran for small-mid cap stocks with a dividend above 3%.
Side note: I still haven’t figured out how to include dividend yield in my google docs tables. If you know, please share.
I have to say that my analysis of HOFT is likely poisoned at this point because I happened to read the analysis at Whopper Investments that was written back in July. At the time the stock was a “hidden” net net due to its LIFO reserve. It was trading for $97M vs. today’s price of $132M – a great return for Whopper Investments, but a psychological hurdle for me.
As a quick reminder on LIFO, I’ll go through a quick example.
Lets say that last year HOFT spent $100 on each of 10 desks that they have in inventory.
This year, they want to add more desks to their inventory, but the cost of the raw materials has gone up. This year’s desks – those that are Last In – cost $200 each to make, even though they are the same exact model due to inflation. This is extreme obviously. It’s just an example.
A customer comes along and wants to buy 8 desks, and is willing to pay $400 per desk.
The Last In desks are the First Out, so the COGS is $1,600 (8 desks at $200 each)
The company now has 12 desks left in inventory, and they are carried on the balance sheet at $1,400. (10 desks at $100, and 2 desks at $100)
However, this clearly under values the inventory.
The result is a LIFO reserve that accounts for this difference in inventory cost.
Back to Hooker – To start, Hooker Furniture is a manufacturer of home furnishings. While historically the company has focused on casegoods – or non upholstered furniture made of hard materials like wood, metal, plastic – the company has moved into upholstered furniture marketed under several different brands intended to appeal to different styles and price points.
My first thought is of course that furniture is a commodity business, and in the opening paragraph of their 2010 10K the company notes that they are among the nation’s top 15 publicly traded furniture companies. Not really something I would brag about.
As with any commodity business I want to know that the company is a low cost producer or that the company has a rock solid balance sheet so that it can survive the inevitable cycle that will come.
Starting with the balance sheet, it is squeaky clean – exactly what I would want to see. As 10/30/11 the company has about $33M in cash and equivalents, and no debt.
As for margins, the 10 year average is around 25%, while the T12M is around 21%. Not surprising that they’ve been squeezed given the economy. Competitors FBN, BSET, and STLY come in at 23.4%, 31.6%, and 16.1% respectively. HOFT doesn’t stand out as a low cost producer, but I’ll take solace in the balance sheet.
Net Margins are pretty skinny at a hair under 4% for the 10 year average. However, FBN, BSET, and STLY all have negative numbers for their 10 year average. It seems that HOFT is better managed to say the least.
10 year average ROE comes in at 9% with the last 3 years being extremely depressed at 5.3, 2.4 and 2.6% for 2008, 2009, 2010. Not surprising due to the housing related nature of the recession. On the flip side, during the housing bubble they weren’t hitting record ROEs. The 2001 Recession saw ROE at 7.5%, so I’ll assume that “normalized” ROE is probably something like 11%. A series of what looks at a glance like 1 time benefits pushes this number further still. However, this number may be a bit skewed due to 2 unfortunately timed buybacks in 2007 and 2008.
To be clear, at this point I am looking at all soft numbers… numbers that are auto generated by a bloomberg spreadsheet that is almost certainly not 100% accurate. However, these numbers are good enough to assume that the company should trade at more than book value if i’m looking at a more book value based valuation.
If I’m assuming normalized ROE is 11%, and I have a 10% hurdle rate, then i’d be willing to pay 1.1X book assuming no growth. Book value is 11.85/share as of now, so thats about $13. The company has made a few acquisitions and has future growth goals well laid out in their 10k though so, lets call it $14.
Not very scientific.
I’d also want to look at cash flow. Generally speaking I think cash flow is better for asset light businesses while book value is better for asset heavy businesses. HOFT is probably somewhere in between.
An average of the simple free cash flow from the last 10 years comes to $1.37 a share. That is just cash from operations minus what bloomberg gives as capex. On a deep dive i would want to make some adjustments – verify where the operating cash is coming from. break out growth cap ex etc.
For now i’m just looking at a rough estimate. If this was an average company I would assume that intrinsic value was around 15X this cash flow number or around $20 – $21. The 15x comes from the Shiller PE. As for FCF vs PE, over long period of times, these numbers should converge anyway.
But its not an average company. Its cyclical. It doesn’t really have a moat. It deserves a lower multiple. maybe 12x or 13x. maybe lower. If we stick with 12 or 13x for now that brings us closer to $16 or $17.
Not very scientific, but enough to give me a valuation estimate of somewhere between $14-$17. This would mean I’d want to pay something like $8 $9 to build in a margin of safety. That puts it back in the range that it was trading in August – and back in hidden net net territory.
While i would like to gain some exposure to an eventual housing recovery, at these prices, HOFT is not the way to do it, so I’ll fill in $9 as my target price on my watch list and wait. If it gets close, I’ll get older 10ks are start from scratch.
Also of note – the CEO owns ~3% of the company. Not bad.
One other thought that – i would want to look into before ever buying… the 2010 annual report has pictures in the inside cover of 18 people besides the board and the management committee. There are 688 total employees. Who are these 18 people? That seems like a lot of management and has me thinking of Gordon Gecko’s Teldar Paper speech.
“Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents.”