The Dixie Group (NASDAQ:DXYN) manufactures and markets higher-end carpets for homes, restaurants, hospitals, hotels, commercial buildings, luxury motor coaches and yachts. The company's products usually appeal to those who are wealthier and the company's financial performance is usually directly related to housing market's performance. When the housing market is doing well, so does the Dixie Group; when the housing market is weak, the Dixie Group suffers as well. Currently, as the US housing market improves, the company's performance should also improve (even though the US is not the only market in which it operates). Will the company's future performance justify its share price doubling?
The Dixie Group started its operations in 1920 as a textile company. In the 1990s, the company transformed itself into a floor-covering company. By mid 2000s, the company's focus shifted towards high-end products with higher margins. The company has a diversified customer base where its top 10 customers account for 16% of the sales and the top 20 customers account for 19% of the sales. This allows the company to keep most of its revenues even if some of its biggest clients were to leave.
Since 2010, the American housing market has been improving nicely. The market is improving for both new homes and existing homes at similar rates and both markets are addressable by the Dixie Group.
(click to enlarge)Not only are people buying more homes at higher prices, but people are also spending more money on remodeling their homes. Many times people remodel their homes in order to be able to raise the sale price; other times they are looking to improve their life quality. In either case, companies like the Dixie Group will benefit greatly from these trends.
The chart below is very interesting to say the least. We are looking at the relationship between the GDP growth in the US and the amount of money people spend on carpets and rugs across the country. Notice that there was a strong positive correlation between the two metrics until about 2006. That's when carpet and rug shipments outpaced the GDP growth by a large margin, but this trend reversed quickly. Since 2007, there is a big disconnect between the two metrics and if the historical figures tell us anything, the disconnect should resolve itself sooner or later. We may start seeing another booming trend for the carpet and rug businesses across the country.
In the chart below, the red line represents the residential fixed investments as a percentage of GDP and the blue line represents the commercial structures fixed investments as a percentage of GDP. The dotted lines are the 42-year averages for both metrics. Historically, the residential fixed investments made up 4.4% of the GDP whereas the commercial fixed investments made up 3.6% of GDP. Currently, the residential fixed investments represent 2.7% of the GDP whereas the commercial fixed investments represent 3.0% of the GDP, meaning both metrics have a lot of room for growth just to reach the historical averages. This signifies a lot of opportunities for the Dixie Group.
Now, just because there are a lot of opportunities for carpet companies doesn't necessarily mean that the Dixie Group will be able to take advantage of these opportunities. We need more data to establish this. The chart below accomplishes just that. Now we are looking at how the Dixie Group has performed in the last decade compared to the carpet and rug industry. The carpet and rug industry is represented by the red line whereas the Dixie Group is represented by the blue line. Notice how the Dixie Group's growth rate has been performing better than the market average over the years. This is especially the case after 2008 (the market itself grew by 6.8% since bottoming, whereas the Dixie Group's revenues grew by 39%). This tells me that the company is indeed in a position to outperform the carpet market once the market is fully recovered.
Currently, the company claims a market share of 3.4% in a market as large as $7.66 billion. Berkshire Hathaway's Shaw leads the market with a share percentage as high as 38.7%. The tiny market share of the Dixie Group shows that there is a lot of room to grow, even though the company is mostly focused on the high-end market. Unlike the chart above, the table below includes only carpets and excludes rugs.
When we look at pricing, all of the Dixie Groups three business units charge customers prices above the market average. The average pricing in the industry is $8 per square yard. Dixie Home's prices range from $9 to $19 per square yard, Masland's prices range from $18 to $40 per square yard and Fabrica's prices range from $26 to $50 per square yard. Overall, the company's average pricing is at $20 per square yard.
As of the twelve trailing months, 41% of the company's revenues come from Dixie Home, 40% of the revenues come from Masland and 19% of the revenues come from Fabrica (the most expensive brand). This is a good mix as no brand actually dominates it.
When we look at the sales channels, retailers dominate the list. Designers and mass merchants also claim a significant portion of the company's sales channels. Surprisingly, builders only claim 3% of the sales channels.
When we look at the most expensive brand Fabrica, designers claim a much larger portion of the sales channel than overall. This makes sense as the Fabrica brand is the highest end solution offered by the company and designers are more likely to carry higher-margin items than retailers.
In 2013, the company is expected to generate $302 million in revenues. Of this figure, $288 million will come from carpet sales and $14 million will come from processing sales. If realized, this year's revenue will be the highest figure accomplished by the company since 2007 when the housing market was peaking.
In the first quarter of 2013, the company generated $75.4 million in revenues and $1.68 million in operating income. This compares nicely with the $62.9 million in revenues and $620,000 in operating income accomplished in the first quarter of 2012.
The company's balance sheet is a little problematic though. Currently, the company has less than $1 million in cash and $86 million in debt. The Dixie Group's assets are worth $209 million whereas the company's liabilities total $145 million. This leaves for an equity figure of $65 million, short of the company's current market value of $100 million. The Dixie Group has to be profitable and be able to reduce its debt significantly in order to hold significant value for the investors.
Moving forward, if the company accomplishes profitability and starts paying its debt off, the stock price has a lot of room to go up. In the last few years, the Dixie Group's performance has been trending in the right direction. The company just needs to step its game up by another gear before its share price can fly. Can the company actually achieve this? The management seems very optimistic and there is a high chance that they can achieve many of its goals. Regardless, investing in micro caps come with high volatility and high risk. I strongly urge the investors to conduct their own research and determine a risk-tolerance for themselves before investing in any micro cap company.