The Dixie Group Is A Strong Buy For Growth Investors

Mar.17.14 | About: The Dixie (DXYN)


The carpet business is tied directly to the healing housing market and has strong upside potential.

The Dixie Group (DXYN) has focused mainly in the residential replacement business with high fashion.

The acquisition of Atlas Carpet Mills makes DXYN a solid player in the high end commercial carpet business.

The could be as much as a 40% upside in share prices over the next 12-18 months.

Friday, we learned that The Dixie Group (NASDAQ:DXYN) purchased a privately held company called Atlas Carpet Mills.

Atlas is a company that has focused on commercial carpeting over the years and has roughly $53 million in sales. From what we happen to know about the business, the margins for Atlas were some of the highest in this business sector. The company is also one of the last privately owned carpet manufacturers around, and while one of the largest publicly owned manufacturer is Mohawk Industries (NYSE:MHK) which has sales in excess of $7 billion or 100 times that of Atlas, this niche player is what makes this acquisition intriguing.

These are two tiny companies flying under the radar, with highly respected brands within the business sector, that both focus on the upper end with higher gross margins. Now that DXYN owns Atlas, it sets Dixie up to become more profitable in the commercial end of the business.

This is the press release of the acquisition

The average gross margin is roughly 30% in the carpet business, and Atlas is PROBABLY higher given the high end business it sought, choosing to avoid the commodity arena. The company (Atlas) never wanted to compete in the lower end portion of the business and selects its business carefully, with a very highly regarded sales and management team.

Dixie Group has focused more on the residential carpet business although it does business in commercial with a strong line of modular tiles under the Masland brand specifically.

Modular, or "carpet tiles" is taking market share away from broadloom carpet for commercial applications, as it is easy to install, easy to replace singular pieces if damaged, and in many cases less expensive. DXYN has already decided to go after the commercial carpet tile business in an even larger way than it already has.

"On the commercial side we'll make a significant move to modular tile. We've been in that business for four or five years now and we're still understanding the differences between it and broadloom carpets. As we learn, we feel like there is an opportunity to grow," notes Frierson (COO and Vice President of DXNY), who sees additional growth opportunity in "lower price points than we currently participate".

As stated in the recent earnings report, steps have been taken to reduce costs and lower prices to participate more heavily in the modular tile sector.

"We brought in new management for our Masland Contract business, initiating a stream of new products to enhance our position within the specified commercial market. We upgraded our modular carpet tile processing equipment to lower cost and improve margins." Stated Frierson.

Of course the balance of having the higher end with greater margins will make this work quite well.

"Further, we launched the Avant product line in 2013 and recently announced both a joint venture and distribution agreement with Desso to expand our penetration in the high-end hospitality market and bring a new set of innovative cradle to cradle modular carpet tile products to the North American marketplace."

Having Atlas, which has focused almost completely on the commercial business, but is lacking a strong modular tile line, creates an immediate synergy with architects, designers, specifiers, and end users. The flexibility that these middlemen will now have, both with DXYN and Atlas, becomes quite appealing in the upper end of the business, and now that DXYN is going after the lower cost business, the company can continue to see revenue growth as it showed in the latest earnings report.

DXYN is a small company with a value of about $300 million, so adding another company with $50+ million in sales at a 30-35% margin makes plenty of fiscal sense to us. The current share price of about $15.00 makes this stock a very compelling buy with an upside of at least 40% (about $20.00) back to its highs before the great recession. The sales and earnings should be accretive immediately and in our estimation, another 15 million on the bottom line is nothing to sneeze at with small cap stocks.

The Fundamentals Are Poised For Rapid Growth

DXYN has a wonderful balance sheet and the fundamentals are already impressive:

  • A 2015 forward PE of 14.35, well below the S&P 500
  • A price to sales ratio of only .58, and an enterprise value vs. revenue of just .89.
  • Long term insider ownership exceeding 16%, and institutional ownership of all outstanding shares of roughly 48%, supports the confidence level of the "smarter money".
  • Gross profit of over $63 million on total sales of just $345 million displays that DXYN already knows how to make money.
  • YOY revenue growth was nearly 35% as of the last earnings report and EBITDA was $24 million.

Adding $53 million in revenues from Atlas, has an immediate surge of 15% on the top line and with an average gross margin of 30% (industry wide) or $15 million to the bottom line should deliver significant shareholder value over the next 12-18 months.

The Future Synergies Of This Acquisition Can Be Found Everywhere

Two tiny companies in a very large business sector can quickly become a force to be reckoned with simply because of the synergies that the merger creates.

From customer service support, to shipping, to keeping the machines running more efficiently, will reduce the average cost per square yard down significantly to where margins overall should increase. Not to mention the immediate increase in revenues and earnings from the Atlas business itself.

With the current fundamentals and the timely acquisition of Atlas, I believe DXYN can top its pre-recession highs quite easily and consistently over the course of the next year or two. The entire action taken by DXYN makes complete, and quite profitable, sense.

My target price is $25.00/share.

My Bottom Line

While I would not buy this stock for income obviously, or for the new BTDP. I would encourage long term growth investors to take a look at this for a strong upside potential.

Disclaimer: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decisions.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DXYN over 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.