The Co. is ridiculously cheap on an asset basis at 171% Net tangible book/Price. The Co. is a manufacturer of wooden furniture for adults and kids. Its a low margin business and has seen sales eaten away by cheaper Chinese manufacturers. The investment thesis hinges primarily on the asset value of $90MM versus a market value of $50MM.
Cash flow has been negative and we don't foresee a marked recovery in the next year. Included in the asset is $30MM of inventory. We believe investors are writing off a large chunk of the inventory, as the soft real estate market followed by fierce competition in the saturated market makes business difficult in the US for wooden furniture.
We read in a write up for this stock that a recovery led by a restructuring has been underway, which could bring a renewed strength in revenues for the Co. The Co. is repatriating the manufacturing operation to their factory in North Carolina. We are skeptical repatriation will boost sales, although there may be a Made in US bias amongst the target customers that could tip the scale.
We played the asset value game with EXM and EXM filed for bankruptcy because cash flow was the issue. However, this Co. has $23MM in cash, zero debt, so no debt interest liability. Could $23MM provide enough buffer for the cumulative cash burn before NI turns black? The Co. is anticipated to burn about $5MM/year at current
margins and sales level, so provides 3-4 years of support. We doubt the Co. will make material reinvestment through capex during this period, or may have to borrow money to do so, or issue secondary shares. However, what bank will lend to a money burning operation, and what equity investor, besides a PE, or activist investor would
place capital in a weak business?
Although the goose is cheap, the goose is not laying any golden eggs. We will stay away from this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.