Norcraft - Disappointing Public Offering Of This Housing Recovery Play

| About: Norcraft Companies, (NCFT)

Norcraft Companies (NYSE:NCFT) made its public debut on Thursday, November 7. Shares of the manufacturer of kitchen and bathroom cabinetry in North America ended their first day with losses of 3.1%.

Given the relative high leverage employed and sub-optimal profitability, I see no other choice but to pass on this offering. Shares of Norcraft have seen quite some weakness in the days following the offering already.

The Public Offering

Norcraft Companies focuses on the manufacturing of a broad range of cabinetry to be used in kitchens and bathrooms in the US and Canada.

The company markets its products through seven brands, primarily through dealers which account for 87% of total sales. The extensive product portfolio is a key advantage according to the company itself. The company has 118 internal sales representatives, distributing to a network of 20,000 customers.

In total the company offers more than 600,000 door and finish combinations.

Norcraft sold 5.88 million shares for $16 apiece, thereby raising $94 million in gross proceeds. All shares were being sold by the company, with no shares being offered by selling shareholders.

Initially, bankers and the firm set an initial price range of $16-$18 per share. Shares were eventually sold at the low end of the initial public price range.

Some 32% of the total shares were offered in the public offering. At Friday's closing price of $15.58 per share, the firm is valued at $284 million.

The major banks that brought the company public were Citigroup (NYSE:C), Deutsche Bank, UBS, RBC Capital Markets, KeyBanc Capital Markets and Stephens.


Norcraft operates in a large and fragmented market. According to research firm Freedonia Group, to be found in the S-1 filing, cabinet sales were $10.3 billion in 2011, expected to grow significantly in the coming years, to about $15 billion. Merely 5 manufactures had sales over $250 million, including Norcraft, while more than 5,000 manufacturer operate in the industry.

The recovery in the housing market, consolidation, strong brands and focus on operations should drive growth in the coming years.

Revenues for 2012 came in at $288.8 million, up 7.2% on the year before. At the same time net losses increased from $7.0 million to $9.3 million. Losses were the result of high interest payments of $25.8 million, resulting from the high leverage position of the firm.

Revenues for the first nine months of the year came in at $259.2 million, up 19.1% on the year before. The company broke even compared to at $5.2 million loss last year.

The company operates with $38.2 million in cash and equivalents. Total debt stands at $244 million, resulting in a net debt position of around $200 million. Factoring in the $94 million in gross proceeds from the offering and the net debt position will be lowered towards $120 million. Note that proceeds from the offering will be used to redeem the very expensive debt at 10.5%.

With the equity in the business being valued around $284 million, Norcraft is valued at 1.0 times annual revenues for 2012.

Investment Thesis

As noted above, the offering of Norcraft has been a disappointment. The company priced the offering at $16 per share, some 5.9% below the midpoint of the original preliminary offering range. Shares have seen a bit more downside, currently trading some 8.4% below the midpoint of the preliminary offering range.

Note that Norcraft's biggest issue is the lack of profitability due to low earnings of the business model combined with the high leverage employed. Gross earnings are just 26.2% of total revenues, while selling, general and administrative expenses totaled 17.7% of revenues. The steep interest payments, of 7.5% of revenues are detrimental to earnings as well, although proceeds of the offering could boost pre-tax earnings by nearly $10 million.

While the continued housing recovery, and improved demand for home-remodeling could continue to drive revenue growth going forwards, I am a bit cautious. The lack of earnings, even when Norcraft would not operate with such a debt position, is a bit worrying, and a key risk as well.

I'll pass on the offering, despite very reasonable price sales ratios. I would like to see further improvements in profitability before initiating any position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.