Craftmade International: Undervalued?

Craftmade International Inc.(Nasdaq: CRFT) manufactures and sells various home furnishings products, both indoor and outdoor. Some of the types of products they produce for inside homes include ceiling fans, door chimes, lighting kits, clocks and weather gauges. They sell product through major retailer chains and wholesalers.

CRFT is a small cap stock with a market cap of $28.2 million. As explained here, small cap companies have more chance of the stock price being inefficient compared to prices of large cap companies. The stock is trading with a P/E of 7.4 and a P/B of 0.77. The stock has a 52 week high price of $17.11 and a current stock price of $4.95. That's a 71% price drop from its 52 week high! The company raised its dividend payout to 12 cents/quarter on Sep 2005, which based on the current stock price, yields 9.7%.

The company is cash flow positive and has been had positive net earnings in each of the past 10 years. In addition, the return on equity average for the past 10 years is 26.7% (positive in each year) and the average return on assets is 11.5% over the same period.

From a liquidity perspective, the company has a current ratio of just over 4 which seems ample for their business. When you include the impact of operating leases to their long term debt levels, the total debt to capitalization level is around 54%. This is not massively high, but it does need to be monitored. As of the last quarterly report (Mar 31, 2008), the interest coverage ratio is around 3 times, which is fine.

This stock looks potentially undervalued but a lot more analysis is required. Stay tuned.

Comments

[DaveMcBlues:]

CRFT may be undervalued currently, but is a BIG future risk IMHO.

Big Box retailers are constantly finding ways to go direct to China to source things like lights, fans, air conditioners, etc. I don't think CRFT has realized the full impact of this trend and I don't imagine they have any real intellectual property to protect (with the exception of this season's design on products they sell).

All one has to do is look at the demise of Fedders (FJCC.pk) to see what happens when the Big Box retailers squeeze you out. Fedders business model and that of CRFT are almost identical... just different products.

2008 Aug 18 09:41 AM

[Reyer:]

Thanks DaveMcBlues, excellent comment!

Craftmade might very well be a company in secular decline. That is always something to consider when valuing a company in order to avoid value traps. Another way to look at a company in secular decline is the eventual liquidation value of the company.

Craftmade is still profitable and cash flow positive, it seems premature right now to conclude they will go bankrupt however your point is excellent and I agree, there is a lot of risk with their business model.

If Craftmade eventually does go out of business what should it be worth today? I would work out a liquidation value for the company based on discounts to hard assets if you believe this will happen. Or, just don't swing at it.

-Reyer.

2008 Aug 18 07:15 PM

[DaveMcBlues:]

Just checking back in on Jan 7, 2009... seems my observations were directionally correct.

[e-mail]


On Aug 18 07:15 PM Reyer wrote:

> Thanks DaveMcBlues, excellent comment!
>
> Craftmade might very well be a company in secular decline. That is
> always something to consider when valuing a company in order to avoid
> value traps. Another way to look at a company in secular decline
> is the eventual liquidation value of the company.
>
> Craftmade is still profitable and cash flow positive, it seems premature
> right now to conclude they will go bankrupt however your point is
> excellent and I agree, there is a lot of risk with their business
> model.
>
> If Craftmade eventually does go out of business what should it be
> worth today? I would work out a liquidation value for the company
> based on discounts to hard assets if you believe this will happen.
> Or, just don't swing at it.
>
> -Reyer.

Jan 07 01:38 PM