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Stanley Furniture Follow Up: No Margin of Safety in this Armoire

Jan. 08, 2011 10:31 AM ETSTLY1 Comment
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As value investors, we are always seeking a Margin of Safety. The MoS can be found in several different areas, including normalized earnings power, discounted cash flow, or hidden real estate or land values. I wrote 2 weeks ago, that based on discounted cash flows and an estimate of ongoing normalized earnings power that Stanley Furniture does not currently offer a margin of safety at its price of around $3 per share.  However, due to some recent corporate actions, it is possible that the assets of STLY could be worth more than what the stock market is currently quoting.

According to a press release from December 20 (emphasis added),

Stanley Furniture Company, Inc. (Nasdaq-NGS:STLY) announced today that it has pre-paid in full its outstanding debt under its note agreement with Prudential Insurance Company of America and other lenders. The amount prepaid was $15 million plus accrued interest. In connection with the prepayment, the lenders agreed to waive the yield-maintenance premium due on prepayment provided under the note agreement. The Company indicated that cash on hand after the debt prepayment was approximately $19 million.

At the same time, STLY also announced they completed a recent rights offering by adding 4M new shares at a price of $3. This cash facilitated the debt prepayment.  Taking a look at the latest financial filing from October 2 and adjusting for the new cash balance and elimination of debt, the new Total Stockholders Equity, aka book value (assets minus liabilities) is $75.1M from the previous balance of $58M, an increase of nearly 30%.  Compared to the total market cap of $37M this looks like an outstanding investment.

The problem is that 4M new shares were issued. This increases the shares outstanding by 40%, actually lowering the book value per share from $5.60 to $5.24. Though the stock is still trading below book value, over half of the assets are in inventory and property and equipment. Given the current competitive environment I’m not sure how reliable the estimates are for the value of the inventory or the equipment that makes it, thus lowering our perceived value even further. Further cash flow and earnings declines will also lower the asset value as cash leaves the balance sheet.

One other interesting piece on STLY is the potential CDSOA payments I discussed in my previous post. CDSOA payments are coming slowly from the government and most are being held up through lawsuits. STLY believes they are owed around $30M in payments. If it was to receive those, this analysis changes completely. Though it may not be enough to jumpstart the business, it may be enough for an activist investor to get involved and distribute the cash to shareholders.

Without any insight into the outcome of the CDSOA lawsuits or the government agency distributing the payments, I think that buying STLY on that premise would be speculative.  I will continue to monitor STLY for further developments as getting full access to those payments could result in a rewarding Special Situations play.

Disclosure: I have no position in STLY

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