Thursday, June 18, 2009

Anatomy of a New Net/Net Position: Chromcraft Revington

Buying net/nets is sometimes an ugly business. It's often hard to justify sinking capital into a business that appears to be headed for the scrap heap. But part of being a net/net investor is knowing the risks inherrent in buying companies that have probably already seen their best days, are thinly traded shadows of their former selves; reduced merely to assets that you believe may worth at least a few times the current price.

Chromcraft Revington is a great example. A member of the Cheap Stocks 21 Net Net Index, the Indiana based furniture maker and distributor has seen sales fall for the past 6 consecutive years, from $214 million in 2002 to just $ 99 million in 2008, a 54% decrease. The company lost $26.5 million last year, or $5.79 per share. In the first quarter of 2009, sales dropped 39% from the same period last year, and the company lost another $3.2 million. Clearly, a bad situation made even worse by the economic environment of the past 18 months.

Greenbackd features an excellent analysis on Chromcraft back in April, making the bearish case. At the time, the company was all but out of cash, and Greenbackd laid out their reasons for exiting their Chromcraft position at $.48. Now trading for $.83, one of the few brightspots in the most recent quarter was the fact that the company raised cash, and ended the quarter with $5.2 million, or $.85 per share, primarily through inventory and account receivable reductions.

While the quarter end cash balance is no reason to jump for joy, if you believe that an economic recovery is under way, Chromcraft may have bought itself some time. Just how long is difficult to say; it depends on the company's ability to cut costs, scale back operations, and is dependent on an uptick in the economy.

What's intriguing about Chromcraft beyond the fact that it has no debt on the books (there are some operating leases, however, a total of $4.4 million through 2012), are the company's other assets. Chromcraft owns a 519,000 square foot warehouse/distribution center in Delphi Indiana, and a 560,000 square foot manufacturing/distribution site in Senatobia Mississippi, for a total of nearly 1.08 million square feet of space. The Senatobia site sits on 100 acres. Granted, probably not the most valuable locations for warehouse space, and commercial real estate is currently suffering, but these assets have value, nonetheless, and are unencumbered by debt.

With current assets of $30.6 million, and total liabilities of $10.3 million, Chromcraft's net current asset value (NCAV) was $20.3 million as as of April 4th, 2009, nearly 4 times market cap. Currently trading at just .25 times NCAV, tangible book value per share is $4.94.

Beyond the risks laid out previously, CRC is a tiny company, with very low trading volume. While we recently took a position in CRC, we did so understanding the risks involved. Proceed with caution.

Chromcraft Revington
Avg volume: 7,000
Market Cap: $5 million
Book Value per share: $4.94
Shares Out: 6.1 million
NCAV:$20.27 million
Market Cap: $5.08 million
NCAV/Market Cap: 3.99

*The author has a position in Chromcraft Revington (CRC). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.


TJF said...

I have followed this stock for years, and have always ended up disappointed. I wish management would just get its restructuring done and move on. Also, back when I followed it, most of its asset value was tied up in inventory. If this is still the case, it probably should be discounted from its balance sheet value for NCAV purposes.

Anonymous said...

Have you looked at the ESOP details? By my reading, the company could elect to discontinue contributing an amount equal to the annual loan interest the ESOP owes CRC. Given that, couldn't we assume if the company were willing to do so the worst case recovery would be putting about 1.5m in unallocated company shares back in treasury? Or is this flawed analysis?