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Flexsteel Industries, Inc.

|Includes: Flexsteel Industries, Inc. (FLXS)

 Flexsteel Industries, Inc. (FLXS) manufactures, imports and distributes residential and commercial upholstered and wooden furniture products throughout the United States through the Company’s sales force and various independent representatives.

FLXS is currently trading at a P/E multiple of just 8.6x (P/E ex-Cash of 7.5x) despite others in the industry trading much higher (La-Z-Boy at 14x, Hooker Furniture at 18.8x, and Leggett & Platt at 16.8x). It was somewhat difficult to find companies in the industry with a valid P/E, because many companies in the industry are losing money (Natuzzi, Bassett, Furniture Brands International, and Ethan Allan Interiors to name a few).

FLXS, on the other hand, has been profitable in 9 out of the last 10 years, enjoys zero debt and a variable cost structure that allowed it to scale back throughout the recession, bringing COGS and SG&A down in line with revenue. Beyond the variable cost structure, management has shown its commitment to keeping costs in line with revenue by cutting headcount from 2400 before the recession to 1400 today.

Some other notes: the company has $1.7 million in LIFO reserves (effectively increasing the current value of inventory) but $1.2 million worth of options issued, so these are pretty close to netting out. Also, FLXS, as an importer, has COGS figures that are somewhat affected by changing shipping freight costs, which were at all time lows over the last few years and now increasing, so we can expect that to increase a bit.

So, is FLXS a value opportunity at $15? I calculated a no-growth perpetuity using multiple Revenue scenarios, the company’s COGS and SG&A as a % of Revenue, and Depex as a % of trailing Net PP&E to derive EBIT. From there, I calculated FCFF and discounted that as a perpetuity to find Enterprise Value, then the Market Value of Equity. I calculated an intrinsic value range of $12.83 – $15.67, which leads me to conclude that the company is fairly valued and that there is not a sufficient margin of safety to make a purchase. However, I’ll keep this on my list. Having done the research, my notes and financial analysis will help in the future should the stock’s price trigger a flag that it has declined enough to warrant a second look.

If you’ve analyzed FLXS in the past, I’d love to hear your thoughts in the comments.

Lesson: Low multiples relative to comparables does not necessarily mean a value opportunity exists. It is important to investigate whether the company is undervalued relative to its own intrinsic value.

Author Disclosure: At the time of publication, the author DOES NOT have a position in securities of this company.

Read more: Flexsteel Industries, Inc. | Frankly Speaking 
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Disclosure: No Position