Wednesday, April 1, 2009

Goodfellow Toughs It Out

As a manufacturer and distributor of lumber and hardwood flooring, Goodfellow (GDL) is currently in a tough industry. The collapse of the US housing market has drastically reduced demand for products in this industry, and Goodfellow correspondingly showed a year-over-year sales decline of 8% in the last quarter. In that same time period, however, the stock price has dropped some 40%, possibly offering long-term investors an attractive price.

The company trades for about $50 million, but an examination of its balance sheet reveals some downside protection for investors. The company shows A/R of $51 million, inventories of $63 million, and total liabilities of $50 million. As such, Mr. Market is offering the investor a 20% discount on inventory, with the company's fixed assets, customer relationships (of which there are 7,000) and manufacturing know-how thrown in for free!

The company has also remained profitable each quarter throughout this downturn, although this is slightly misleading. The company had an operating loss of $800 thousand in its most recent quarter, but due to a one-time gain it showed a net profit of over $2 million. Nevertheless, the company has cut its costs by over 10% in most of its divisions (compare this to the year-over-year sales drop of 8%). Furthermore, the seasonality of the company is worth noting, as the summer quarters generally result in operating profit figures which dwarf those of the winter months.

A recovery in housing may not be on the horizon for a while. However, for investors looking for minimal downside risk with the potential for capital appreciation, companies like Goodfellow may offer such opportunities.

Interested in another perspective on GDL (or any other stock that's currently on your mind)? One of our sponsors, MarketClub, has offered our readers a free analysis of a stock of their choosing here.

Disclosure: Author has a long position in GDL


Anonymous said...

Great job on running the blog!

GDL had $28m of STD and only $0.4m of cash as at 31 March 2009. Don't you think this could lead to some short term liquidty problems given poor CF performance?

Saj Karsan said...

Thanks, Anon.

Liquidity is certainly a risk, however it is unlikely this company could not get an extension considering the liquid assets dwarf that debt amount.

Raven said...

I totally missed the "one time profit" when I read through the GDL financials the first time.

Thanks for pointing that out!

Max said...

Hi, 12 years have gone by, valuation roughly doubled, considering time horizon and huge GDP advancement during this time frame, its not a huge achievement vs SP 500 index. But what is interesting is that Discount to Net Current Assets is firmly in place. This is probably more to do with poor business dynamics particuarly extremely poor margins and extremely low return on capital. I do not think Mr Market is wrong for over a decade.