Normally, I only invest in two kinds of companies:
- Companies that have some kind of competitive advantages: Intel (INTC), Altria (MO), Philip Morris (PM), and to some extent, Core Molding Technologies (CMT), are a few of the examples.
- Spin-off opportunities like Dole (DOLE) and Vivendi (OTCPK:VIVHY), where the companies have assets that they could sell or spin-off to unlock value.
Stanley Furniture (STLY) does not fall into either of those categories, as it is unprofitable on an operating basis, has no competitive advantages, has no hidden assets that hold underlying value, and it has been relying on the government, at least in part, to stay in business. Stanley is a hardwood furniture manufacturer that caters to high-end buyers, as almost all of the items it sells retail for more than $1,000. It sells its wares online and through various retailers, such as Nebraska Furniture Mart and smaller family owned furniture stores.
The company was very hard hit starting in 2005, and its decline furthered during the recession. To this day, Stanley Furniture is still struggling and since 2005, it has had to sell most of its buildings, rework its entire business structure, and fire employees just to stay afloat. The company has been unprofitable on an operating income basis since 2008, and has only been able to stay viable due to its restructuring and special income from antidumping legislation, which I will explain later. So why would I be interested in a company like this, one that I normally would discard right off the bat?
What initially got me interested in Stanley is that I noticed that it currently has about $45 million in cash and short term investments, while its market cap is around $65 million, so the company appears to be covered on the downside if things deteriorate further. At least that is what I originally thought.
I went back and read all of its annual reports since 2005, when the company's problems started, to try to find the cause, and to see if the company could regain a portion of its former profitability, how it has been managing its cash since that time, and where its recent $40 million infusion of cash came from.
What I found is what I would assume a lot of companies went through from 2005-2009: Stanley Furniture got overoptimistic about the future, which led to inefficiency, which led to having to restructure its operations and fire workers, which led to burning through a lot of cash in that time period and building debt. In fact, the company looked like it was heading towards bankruptcy until it received $40 million in funds from the CDSOA antidumping legislation.
The Continued Dumping and Subsidy Offset Act (CDSOA) can be explained in these two links for those who would like to learn about the legislation: US-China Antidumping Laws and The US Antidumping Law: Rhetoric Versus Reality. For those who would rather watch paint dry, I will do my best to explain the basics of the antidumping policy.
My understanding of the law is that it was passed with the clear-cut intent of stopping foreign businesses from INTENTIONALLY harming United States companies by "dumping" their products in the U.S. at below cost in an attempt to put their U.S. competitors out of business. The law now has turned into a convoluted mess, where foreign companies can be made to pay duties on items sold in the U.S., even if the U.S. cannot prove that they are intentionally undercutting prices. In other words, the legislation has turned into a form of trade protectionism, where the U.S. has been accused of breaking international law. The money that is taken from the foreign company as "duties," is given to U.S. companies that have been affected by the supposed dumping infractions.
Why is the above important? The law is being used now to keep badly run U.S. businesses afloat, and keep foreign competition out of certain industries that want to lower prices, one of which is the wood furniture market. The law also keeps prices artificially high for the companies, in spite of the consumers, so that these poorly run businesses like Stanley can stay in business.
Stanley has received more than $60 million of these duties in recent years, with a big chunk of the $40 million paid out in the last few months. Without these funds, Stanley would have probably not been able to stay viable as a business, would not have been able to pay off all of its debt, and most likely, would have gone bankrupt. On top of that, Stanley stated in its second quarter 2012 quarterly report that there is a small chance it will have to pay back a portion or all of the $40 million it received because the claims have not been fully resolved. Although I have not been able to find confirmation of this yet, it appears that if Stanley does get to keep the $40 million, it will most likely be one of the last payments it receives of this kind, as the law has since been repealed and no dumping after October 1st, 2007 is considered.
The $40 million in payments are a portion of a larger pool of duties taken from foreign competition in the entire hard wood furniture industry. The $40 million is only Stanley's portion of the duties, all of which were assigned before October 1, 2007. As I mentioned earlier, the law that enabled these antidumping duties to be paid by foreign competition to U.S. hard wood manufacturers has since been repealed, so no antidumping accusations that have taken place after October 1, 2007 are considered.
Knowing the above, let's get to Stanley's valuations.
These valuations were done by me, using my estimates, and are not a recommendation to buy any stock in any of the companies mentioned. Do your own homework.
|Assets:||Book Value:||Reproduction Value:|
|Cash, Cash Equivalents, and Restricted Cash||25||23|
|Short Term Investments||20||20|
|Accounts Receivable (Net)||11.9||10|
|Other Current Assets||0.6||0|
|Total Current Assets||92.3||70|
|Other Long Term Assets||3||1|
With full $40 million of cash from CDSOA settlement.
- 81/14.5=$5.59 per share.
Using $20 million from CDSOA settlement.
- 61/14.5=$4.21 per share.
Using 0 from CDSOA settlement.
- 41/14.5=$2.83 per share.
Book Value Per Share:
- Current with full $40 million CDSOA money = $6.28 per share.
- With only $20 million in CDSOA money = $4.89 per share.
- With 0 money from CDSOA = $3.51 per share.
I did other valuations and the research that I normally do, but since this is a bad business, I wanted to just focus on its assets and see what kind of value they held.
Even with its restructuring, Stanley is still an unprofitable company on an operating basis, and I do not see a clear path to its former glory unless the economy as a whole booms again, which is the last time the company was doing well. Since the economy is not booming, or showing any signs of potentially booming, and this company has been burning through cash at a high rate over the last several years, and has only been kept alive by the CDSOA payments, which appear to be ending, I would use the $2.83 per share reproduction value as the price that I would be comfortable buying at. At that price, you are essentially just paying for the assets with everything else coming for free, and the risk would be very much minimized. However, I do think that I can find much better businesses to invest my money in, and would still probably not buy at that price. Stanley's current share price is $4.32 per share.