Bassett: +41% EPS, 33% Net Cash And 5x P/E Make For An Attractive Buying Opportunity

Summary

• Bassett EPS is up 41% YoY for the 3Q.
• The stock has a net cash position of $5.80, or 33% of the stock price.
• Bassett is 53% off its recent 52-week highs, and this is a good time to get invested.
• Lumber prices plummet – a good sign for the housing market which has been booming, creating opportunities for the furniture industry in its track.
• Despite Bassett’s stock up 46% since our September initiation, we still see 62% upside going forward.

CreativaStudio/E+ via Getty Images

Bassett (NASDAQ:BSET) is a leading retailer, manufacturer, and marketer of branded home furnishings. The company has $5.80 per share in net cash as of the 3Q ended August. This cash balance currently represents an impressive 33% of the stock price. Since the company is operating in a low interest rate environment, after removing interest income after tax, we get a P/E [after taking out net cash of $5.80 per share] of 5.4x on a normal FY11/2022e which shows that this furniture business is undervalued. With rising FCF as well [12.7% on EV for the FY11/22], the company has great fundamentals to be able to take advantage of the ongoing housing boom, which has helped the residential furniture sector. More people moving to suburbs and low tax states, lower mortgage borrowing rates, and higher disposable incomes due to lower discretionary expenditure are the primary reasons.

3Q Results

Source: Bloomberg Terminal

Bassett reported their 3Q results for the month ended August. Both EPS [$0.31] and revenue [$119 million] were in line with consensus for this quarter. The $119 million in net sales for this quarter was up 30% YoY which is an easy comparison, but it is to be noted that these sales were up 7% from 2019 which was a normal year. In addition, quarterly wholesale revenue grew by 32% compared to last year and by 17% to 2019.

The company was still facing difficulties this quarter as a result of Covid-19 which greatly affected supply chain, but we believe that this is only temporary as Bassett looks to fulfill its record backlogs. Once Covid-19 eases globally, which it already has, these supply chain issues will greatly deteriorate and cease to be a risk for Bassett.

Bassett has had strong YoY growth in its sales segments, with wholesale leading the way at 32% growth. Wholesale revenues have increased by 17% compared to 2019.

For Bassett, total inventory stands at $73.8 million, ~$19 million more than at 2020-year end. They have an order backlog of $92.8 million, which is led by domestic upholstery and outdoor furniture sales, growing by 7.1% in the period as incoming orders once again outpaced shipments. Gross margins have improved as the company has instituted a general price increase.

Bassett has been down from $35.00 to $17.00

Bassett has been down 51% largely due to Covid-19-induced supply chain issues. Since these supply chain and logistical concerns are temporary, we feel that Bassett will rebound from these lows. Asia’s shipping ports and ocean vessel containers are opening up and this is a good sign that exports are picking up. We strongly believe that at around $17.00, Bassett is a buying opportunity given the favorable outlook ahead for this company. The company has been having record backlogs for their wholesale division and soon these backlog orders will be fulfilled. Bassett is working with their vendors to schedule adequate production to reduce their large wholesale backlog and offer higher levels of service in the near term.

Valuations & Price Target

This company has been building their cash on the balance sheet at a rapid pace. With $5.80 per share in net cash, this currently represents an impressive 33% of the stock price. Since the company is operating in a low interest rate environment, after removing interest income after tax, we get a P/E [after taking out net cash of $5.80 per share] of 5.4x on a normal FY22e which shows that this furniture business is undervalued. Given below is a valuation table for FY21e and FY22e based on our projections:

BSET	FY11/2021e	FY11/2022e
P/E	7.9x	7.3x
Ex-Cash P/E	6.6x	5.4x
FCF Yield	5.1%	12.7%
FCF Yield on EV	6.3%	17.6%
EV/EBITDA [on today's B/S]	3.8x	3.6x

Click to enlarge

Based on these strong valuations, our target price remains unchanged for Bassett at $28.50, representing 62% upside from the current market price. We reached this price target by taking a conservative P/E multiple of 15.0x and revising up our prior EPS estimate to $1.90 [which was reached previously in FY11/2015]. Our previous EPS estimate was $1.69, but with the improved outlook, we revised it up for a normalized FY11/2022. We did this to be more in line with the current robust business outlook and macro-trends of the bullish housing market.

Our price target was calculated by taking our EPS estimate of $1.90 [after factoring out interest income after tax] and multiplying the aforementioned multiple of 15.0x - we get a finalized price target of $28.50.

Real Estate Market: 2022 Outlook Remains Robust, Housing Boom Continues

The U.S. has seen a record housing market with residential homes seeing an unprecedented surge in demand. As of current, the demand for houses is outstripping supply, with 30-year fixed mortgage rates still hovering around 3.1%.

Lower inventory on the market has led to increased prices, but still demand remains resilient.

The main reason that people were able to afford homes, despite the pandemic and rising home prices, however, was because of rising wages and falling mortgage rates.

"Rising wages and falling mortgage rates still compensated for near-20% spikes in home prices over the past year, helping to keep median home prices affordable for average wage earners around the country," stated the report.

Lumber

Lumber prices were up over 100% YTD just a couple months back in April, which was then viewed as a strong negative concern for housing and furniture stocks. Lumber prices even factored into overall USA inflation and Fed policy discussions. But prices have since collapsed and are now down close to -10% YTD. This is a bullish sign for housing and furniture stocks and eliminates one risk factor.

Source: Bloomberg Terminal

Conclusion

Bassett still looks incredibly cheap. The company is trading at an ex-cash P/E of 5.4x on FY11/2022e [7.3x normal P/E] which makes it very undervalued and a great buying opportunity. Bassett also has 33% in net cash, with no debt on its balance sheet. The stock has gone lower based on the notion that the housing cycle is now reached a saturation point; however, we still see the cycle progressing in FY23 and maybe beyond. This is based on factors such as low interest rates, work-from-home, millennial buying, and the exodus of individuals away from big cities to suburban locales. Even though the stock price has gone down, Bassett still looks inexpensive from every angle and is still attractive to buy given the attractive macro environment that is still present. As a result of this, we have given the stock a 62% upside from the current market price.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BSET either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.