Is Flexsteel actually a cheap stock?

Flexsteel (FLXS)

Price: $14.84 (8/28/2011)

This is a company that I saw mentioned in a Globe and Mail article about value investors snapping up shares of cheap companies.  Flexsteel was mentioned towards the bottom of the article as a company selling for less than working capital without any debt, in otherwords to most investors an insanely cheap company.

I decided to take a look at Flexsteel again, I had previously looked at them and passed on investing about eight to ten months ago.

The company is identified in the article as selling for less than working capital.  In a raw sense that is true, current assets are $128m and current liabilities are $27m resulting in $101m in working capital against a market cap of $98m.  I prefer to look at the net-net value of a company with a little stricter lens, for Flexsteel this means ignoring the deferred income tax (which couldn't be used in a liquidation) and factoring in liabilities such as operating leases.  Here is the net-net worksheet I have for Flexsteel:

As you can see the company's net-net value is a bit lower than the current share price, at $12.36 verses $14.64 for the latest close.  But either way it's close enough to be valuable, I would consider the net-net value or the discounted net-net value to be the downside for this stock. 

What is Flexsteel?

When I first saw the name Flexsteel in a screener list my first thought was that this is some sort of steel products company, or a business related to the steel industry...I was wrong.  Flexsteel is a furniture manufacturer that makes home furniture, RV furniture, and hospitality furniture.  Home and RV furniture accounted for 76% of sales in 2011, the commercial (hospitality) segmented accounted for 24% of revenue.

The company sells residential furniture through local furniture dealers.  I entered my zipcode and 13 dealers came up within close driving distance, so the furniture appears to be widely available.  In addition they offer a large selection of furniture, their website has a lot of pictures and configuration options.

Operating Aspects

Flexsteel isn't selling for below my calculation of liquidation value, but that isn't terrible considering the company is profitable and has been improving their operations.  I will list some operating stats below, but one aspect I want to point out is the following.  In the year 2007 the company's revenue peaked and resulted in $9m in net income which was produced by 2290 employees.  This past year the company earned a net profit of $10m on a lower revenue amount with 1300 employees.  This says two things to me, the first is that the fat has been cut, and the second is that margins are unlikely to expand going forward.

     -22% gross
     -4.67% operating
     -3.07% net margin

ROIC - 9.7%
ROA - 6.4%
ROE - 8.46%

Additional Aspects

One thing I found very fascinating and odd is that Flexsteel has $12m in current assets labeled as "Other Assets".  In the notes Other Assets is defined as a deferred compensation plan for executives that is invested in something called a Rabbi Trust.  The Rabbi Trust is a fund that invests in stocks and bonds.  The trust can't be used for general corporate purposes only for compensation, and in the even of a credit event the trust is considered a creditor to the company.  Deferred compensation plans are nothing new, but currently 12% of the current market cap is tagged as compensation for execs, eyebrow raising at the least.

The company pays a dividend of $.30/sh an increase from $.20/share the previous year.  It appears the company first started paying a dividend in 1992 and has paid it continuously until the depths of the financial crisis when it was suspended.  The dividend is currently a reasonable 20% payout ratio, and management seems inclined to continue increasing it.

As for valuation the shares are reasonably cheap, but not extremely cheap.  The company is trading at a EV/EBIT of 5 and an EV/FCF of 7.14.  While those are decent metrics I feel there are much cheaper companies available with the same or better downside protection.


I'm glad I took a look at Flexsteel again, this is a company I would consider purchasing if it falls below NCAV again, but at the current price the business doesn't seem cheap enough to excite me.  When considering the entire investing universe Flexsteel appears cheap, but considering the deep value, and small cap universe Flexsteel just appears to be slightly cheap.

Talk to Nate about Flexsteel

Disclosure: No position in Flexsteel

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