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Tandy Leather Factory (TLF) has long been an undiscovered small cap stock and remains undervalued to this day. With 12 out of 14 consecutive quarters of earnings per share growth (the other two were unchanged), a low valuation relative to the balance sheet, and a steady growth strategy, I am baffled this stock has remained undiscovered for so long.

The first thing I analyze on any company is the last several quarters of earnings and revenue growth. Here is how these stack up at TLF.

Year over year comparisons
EPSEPS previous% changeSales % change
1st Quarter 2009$ 0.06$ 0.0520%-1%
2nd Quarter 2009$ 0.08$ 0.0633%-6%
3rd Quarter 2009$ 0.05$ 0.0425%3%
4th Quarter 2009$ 0.12$ 0.0933%12%
1st Quarter 2010$ 0.09$ 0.0650%11%
2nd Quarter 2010$ 0.11$ 0.0838%10%
3rd Quarter 2010$ 0.05$ 0.050%8%
4th Quarter 2010$ 0.16$ 0.1233%11%
1st Quarter 2011$ 0.11$ 0.0922%9%
2nd Quarter 2011$ 0.11$ 0.110%11%
3rd Quarter 2011$ 0.08$ 0.0560%13%
4th Quarter 2011$ 0.17$ 0.166%9%
1st Quarter 2012$ 0.15$ 0.1136%14%
2nd Quarter 2012$ 0.15$ 0.1136%6%

As one can see, the management at Tandy has produced consistent earnings growth over the last few years. Even in a very difficult 2009 retail environment, this small leather retailer managed to produce nice year over year growth. Today's trailing twelve months earnings are at the highest level of any point in the last 12 years, maybe even longer. The company's steady as it goes attitude towards store growth has allowed management to create earnings gains at a rate faster than sales growth (more on this later).

The second item I inspect for a company is the balance sheet. Tandy's balance sheet has been in excellent shape for the many years I have followed the company and remains as such today. The company has $0.38 per share in cash as of the latest quarterly report. This may not sound spectacular, but the company chose to pay out $0.75 per share in a one time dividend in June of 2010 and another $0.25 per share in February of this year. These dividends were financed through cash on hand. Another reason for the low cash on hand is a big increase in inventory, amounting to roughly $1.00 per share in extra inventory versus a year ago (more on this later).

On the other side of the balance sheet, the company has about the same amount of long term debt as cash on hand, and no red flags in the current liabilities section. Lastly, the company's equity is just under $3.50 a share, even after the $1.00 in dividends in the last three years.

The final item I look at for a company is how consistent the business plan has been and what the future holds, according to management. I have followed Tandy long enough to have accumulated some trust in the words placed in their press releases. Therefore when this snippet from the CEO and President, Jon Thompson, is in the latest quarterly report, I tend to believe it:

We are confident that the intentional increase in our stores' inventory levels is having a positive impact on our sales. Gross profit margins as a percentage of sales were extremely strong this quarter as we continue to take advantage of special buying opportunities.

This tells me the company has been sticking with the presented business plan of buying leather and leather products in bulk, for inventory, at low prices. The company has not been one of those retailers trying to expand at a rapid rate and put up a new store every month, week, or even day. Instead, the company has slowly grown retail locations over the years both domestically with 96 locations, and now internationally with three locations. Management truly is intent on keeping strong margins versus a vastly expanding store count.

On the heels of Thursday's announcement of a 9% increase year over year in August sales, the stock has barely budged. In this release, the CEO said he does "not expect to see a further increase in our inventory investment as we move through the remainder of the year." This leaves the company as a cash rich, undervalued, small cap stock going into the end of the year. Given the consistent earnings growth, strong balance sheet, and steadily executed business plan, this is a small cap stock investors should keep on their radar.

Source: Tandy Leather Factory - An Undiscovered Retailer With Strong Fundamentals