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This is written with serious investors in mind, though sometimes they're just drafts in progress. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Thursday, February 26, 2015

$STLY: 4Q14 earnings and the margin of safety

Stanley Furniture STLY is was a US domestic manufacturer of youth furniture under the "Young America" brand and operates as an offshore producer of the "Stanely Furniture" brand as well. I've written a bit about it here ...


... to keep this summary as brief as possible, in 2010 the co embarked on a program to manufacture the youth business domestically, selling the "Made in USA" / higher quality / safer for kids theme while going against the tide of offshore production.

This decision was made by the CEO Glenn Prillaman. From 2010 through 2014, the company invested $9M into a manufacturing plant in NC and burned shareholder equity from $93M in 2009 to $75M.

In 2014, the same CEO reversed the strategy, closed the plant and now with shareholder equity down to $50M, they are becoming a "lean" variable cost designer, source-er and marketer of case goods furniture. In 2014 they also ended the "Young America" brand ... but then decided to relaunch it later in 2015 as an offshore manufacturer.

I'm a believer that when you make a mistake, as soon as you know it, own up to it and change it. It's never too late. So I applaud the CEO's intellectual honesty despite his value destruction (and I also applaud the activist investors involved in the stock for pushing him in that direction).

I'm also a believer as an investor in "margin of safety" and that's what we have here. In this case, the margin of safety is hidden. 

In order to understand it appropriately, two adjustments need to be added to the balance sheet.

The adjustments are ...

adding the $15M cash surrender value of an insurance policy to cash (it resides on the BS as a l/t asset)
adding a $4.5M distribution from CDSOA expected in 1Q15. (CDSOA is money collected by U.S. Customs for imports covered by antidumping duties; as a former domestic producer they are entitled to their share).

Here is a table showing the balance sheet unadj / adjusted ... 

... these adjustments indicate multiples far more appropriate for a value investor and one focused on a margin of safety. (The net / net calculation is cash + .75 AR + .5 INV less current liabilities). 

The bottom of the table infers the EBITDA required to hit an 8x multiple. On an adjusted basis, this is $700K per quarter, about what the company did in 4Q14.

The company will re-introduce the YA brand in 2015; it formerly contributed roughly $40M in revenues / year. If it can do 1/2 that in line with existing mid-20% GP and 4% EBIT margins, then EBITDA could grow 25% from current levels.

Not a lot needs to go right to see the upside. It doesn't take a big imagination to see the stock growing at least that much in one year's time, with a margin of safety on the downside.

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