Saturday, August 16, 2008

Potentially Undervalued: Craftmade International

Craftmade International Inc.(Nasdaq: CRFT) manufactures and sells various home furnishings products, both indoor and outdoor. Some of the types of products they produce for inside homes include ceiling fans, door chimes, lighting kits, clocks and weather gauges. They sell product through major retailer chains and wholesalers. This company could be described as somewhat boring, which if you read Buffet, is a good sign for value investors.

CRFT is a small cap stock with a market cap of $28.2 million. As explained here, small cap companies have more chance of the stock price being inefficient compared to prices of large cap companies. The stock is trading with a P/E of 7.4 and a P/B of 0.77. The stock has a 52 week high price of $17.11 and a current stock price of $4.95. That's a 71% price drop from its 52 week high! The company raised its dividend payout to 12 cents/quarter on Sep 2005, which based on the current stock price, yields 9.7%.

The company is cash flow positive and has been had positive net earnings in each of the past 10 years. In addition, the return on equity average for the past 10 years is 26.7% (positive in each year) and the average return on assets is 11.5% over the same period.

From a liquidity perspective, the company has a current ratio of just over 4 which seems ample for their business. When you include the impact of operating leases to their long term debt levels, the total debt to capitalization level is around 54%. This is not massively high, but it does need to be monitored. As of the last quarterly report (Mar 31, 2008), the interest coverage ratio is around 3 times, which is fine.

This stock looks potentially undervalued but a lot more analysis is required. Stay tuned.


Anonymous said...

They suspended their dividend in July unfortunately. They also missed one dividend in 2006 so I'm not sure if it's something to worry about.

Reyer Barel said...

Hi Paul,

yes in May 2008 they announced a suspension of the dividend. In the last quarterly financial report management reiterated the policy of using free cash flow to pay down debt, pay dividends, fund acquisition, fund investments and repurchase stock. However, there is new management at Craftmade so we will have to see how they use the cash.

Within the last calendar year, $16.8M in cash was used to pay for acquiring the assets of Woodard LLC. I noticed the deb to capital ratio is getting up there, so its entirely possible management wants to pay down debt further given the market conditions.

I take solace in the fact the company has a great track record for being free cash flow positive, good (not too volatile) operating margins and has raised dividends at a very respectable dividend compound growth rate over time. This is a small cap company, so it's not unusual for the dividend payments to be more inconsistent than large cap companies. So far I am not concerned, but i wan't to see how the new management is going to use the free cash flow over the next few quarters. I will be looking at whether they pay down debt and/or do something else intelligent with cash saved from the suspended dividend.

What do you think?