Tandy Leather Factory: Sturdy Micro Cap Value

Oct.25.10 | About: Tandy Leather (TLF)
At Vuru, we root for individual investors and sometimes the best way for them to succeed is to pick up stocks that are neglected by the majority of investors.

Tandy Leather Factory, Inc. (NASDAQ:TLF) is one of those hidden gems. It's a retailer and wholesale distributor of a line of leather and related products. TLF has three divisions: Wholesale Leathercraft, Retail Leathercraft and International Leathercraft; and currently operates 30 Leather Factory Wholesale stores and 75 Tandy Leather Retail Stores.

TLF is a solid business. There are only a handful of small companies who have delivered positive free cash flow every year for the past ten years. It is especially impressive when you consider we've had two recessions in this time. This accomplishment speaks to the quality of management, resilience of the business model and its potential to be a stock we'd "be perfectly happy to hold if the market shut down for 10 years" (Quote from the great Warren Buffett).

Let's a deeper look:

Sales to TLF's five largest customers made up only 6.3% of Consolidated Sales in 2009

The problem with a lot of small or micro cap stocks is that they rely on one or two customers for a large share (30%+) of their sales. If they lost one of those key customers, they would certainly struggle.

Tandy Leather doesn't have this problem and I love it. They would need to lose all five of their biggest customers to even see a dent in sales.

Free Cash Flow (FCF) has been positive for the past ten years and has grown by an annual median growth rate of 15.77%

Like I mentioned above, TLF delivering ten years of positive FCF is pretty impressive. It is even more so because the amount of FCF has grown consistently over this same period. These two aspects combined are proof that management has led well by knowing their business area & executing on their business model.

I would say that 99% of the time ten years of positive FCF is accompanied by significant growth in shareholders' equity. TLF is no exception. Shareholders' equity has grown 180% in this time at an annual median growth rate of 15.81%.

Current Assets cover Total Liabilities

TLF has a good balance sheet. It has significant liquidity with Current Assets covering all of its debt. If times turn tough, the company can easily cope. Today, Current Assets minus Total Liabilities account for over 36% of TLF's market value.

Ronald Morgan, one of Tandy Leather's Founders & former Company Directors, owns at least 8.4%

Even though Ronald is no longer involved in the day-to-day operations, his decision to maintain significant ownership of TLF speaks to his confidence in the management team and that's a big statement coming from a person who originally ran the company himself. Also, let's not forget that this is no small sum. He's maintaining a position worth over $3.87 million!

Tandy Leather Factory is significantly undervalued from a Growth perspective

The Vuru Engine determines a stock's growth price based on the company's ability to grow FCF in the future. TLF is undervalued by 41.91%, according to our growth approach.

  • Vuru Growth Price: $6.39
  • Current Price: $4.50

Verdict

Tandy Leather Factory has great management, a solid balance sheet and most importantly, a history of delivering shareholder value. All of this makes it an excellent company.

The icing on the cake is the vote of confidence from one of the company's original founders and also, that TLF is significantly undervalued.

We would happily own this stock "if the market shut down for 10 years".

NOTE: Please read our disclaimer.

Disclosure: No positions