Wednesday, December 24, 1997

Craftmade International Inc.
(Nasdaq: CRFT)
Phone: 972-393-3800
Price (12/23/97): $12 1/8


HOW DID IT DOUBLE?

Craftmade International sells ceiling fans and light kits for the home improvement market. Not exactly a sexy, high-tech story. Followed by just one broker down in Texas, the company is virtually unknown. Even so, Craftmade has put together one heck of a year, airing out a three-bagger despite dim sales growth and dimmer lamp sales.

A fall-off in new home construction in 1995 pushed the stock below a split-adjusted $4 a share. Management considered that a bargain and started buying back shares. By the September '96 quarter, fan sales began picking up, rising 22.6% and starting a string of double-digit gains. A new line of bathstrip lighting introduced in January also brightened up sales.

Some questions remained, though. Troubles at retailer Bombay Co., Craftmade's main lamp customer, cut FY97 lamp sales by $2.5 million and created inventory problems. Also, a new manufacturing facility purchased in December 1995 reduced selling, general, and administrative (SG&A) expenses but added some hefty interest payments.

Still, FY97 results announced in September showed how a 6.7% reduction in share count and some operating leverage from 8.8% higher revenues could produce a substantial boost in net income (up 15.7%) and an even bigger payout in earnings per share (up 25%). For the first quarter of FY98, a mere 7% sales boost swelled profits by 40% as earnings per share rose 50%.

It also didn't hurt that one of Craftmade's Taiwanese suppliers delivered price concessions that pushed gross margins up 3% to 39.8%, an event that could repeat itself given the continued currency weakness in the region.

In case investors were still missing the story, in mid-October Chair/CEO James Ridings reiterated his belief that FY98 net income will rise by more than 50%. He also declared a 3-for-2 stock split citing "our confidence in the future profitability of the company."

BUSINESS DESCRIPTION

Based in Coppell, Texas, Craftmade designs, distributes, and markets ceiling fans (69% of sales), light kits (16%), accessories (8%), lamps (5%), and bathstrip lighting (2%). It offers 148 models of ceiling fans, 78 lighting fixture models, and 14 series of Accolade brand lighting strips.

The company uses independent sales representatives to market its products to more than 1,500 retail outlets, which then sell to the new home, remodeling, and replacement markets

Aside from lamp production, nearly all of Craftmade's products are made according to its designs by Fanthing Electrical and Sunlit Industries, both based in Taiwan. Insiders own 24.4% of the Craftmade, with 21.8% held by Ridings.

FINANCIAL FACTS

Income Statement
12-month sales: $40.3 million
12-month income: $2.5 million
12-month EPS: $0.56
Profit margins: 6.2%
Capitalization: $52.8 million

Balance Sheet
Cash: $0.4 million
Current Assets: $20.2 million
Current Liabilities: $11.0 million
Long-term Debt: $7.3 million

Ratios
Price-to-earnings: 21.7
Price-to-sales: 1.3

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Craftmade is the kind of company I'm coming to love. The business is dull enough to be easily understood, especially since it's consumer-oriented and basically responds to economic factors (for example, new housing starts) that are a cinch to follow.

It could have been found by screening for smaller cap firms delivering 5% sales growth and rising profit margins, and then focusing on companies with little or no analyst coverage. What you're looking for are signs of improving results after a flat or down period combined with management confidence.

In this case, there was a new product launch, an aggressive share buyback program, and increased operating efficiencies due to capital improvements. Craftmade could have been spotted as early as last January, when it delivered an 267% EPS gain on 15% higher sales but was still trading around $5 a share split-adjusted.

WHERE TO FROM HERE?

Craftmade's success depends on the strength of the economy. With interest rates low and apparently headed lower, new housing starts should remain strong.

Internally, a resolution of the lamp division's troubles should also help profits. The company is now reducing its inventory through "seconds" retailers, a process that should be completed by March. The division will either continue as a single-customer manufacturer with low overhead or be dissolved. No material charges are expected at this point.

In mid-October, the company ended its stock buyback program, potentially a sign that above $10, the stock looks more fairly valued. Craftmade also wants to reduce the $9 million outstanding under its revolving credit facility and the $7.9 million payable under a 12-year note.

With quarterly interest payments of $0.35 million, cutting into this could further improve earnings in the year ahead. Operating cash flow in the first quarter was $1.7 million, so Craftmade should make some headway in this area.

The one analyst's earnings estimate calls for $0.75 per share for FY98 ending in June and $1.10 for FY99. That puts the PEG at 0.42 and, based on long-term growth of 40%, gives us a YPEG fair value of $30. Growth of 40% seems awfully optimistic when the industry rate is closer to 13%. Also, such valuation tools don't work that well with economically sensitive businesses.

But even assuming more realistic numbers, Craftmade may be able to continue to fan its stock price higher.

-- Louis Corrigan
(TMFSeymor@aol.com)


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