Monday, September 14, 1998

Stanley Furniture
(Nasdaq: STLY)
Phone: 540-627-2000
Website: http://www.stanleyfurniture.com
Price (9/11/98): $19 23/32

HOW DID IT DOUBLE?

Although Stanley Furniture makes residential wood furniture, its results have been anything but wooden -- unless you're talking about the kind of lumber Cardinals' first baseman Mark McGwire's been swinging. The double over the last year (before pulling back some with the recent market downturn) comes atop an all-star six-bagger performance over the last three seasons.

The strong housing sector and record-high consumer confidence have folks shopping, and Stanley's furniture has been a favorite purchase. For the first half of 1998, revenues jumped 20.6% and net income tacked on a 24% gain. The second quarter was especially strong, with sales up 25% and net income up 30%. These terrific results come even with lumber prices running high.

The earnings growth has been even more spectacular, vaulting 61% in the latest quarter and 55% for the year. Stanley has now delivered increased year-over-year EPS for twelve consecutive quarters.

This bottom line explosion comes courtesy of well-timed stock buybacks over the last 19 months. The company has repurchased 2.6 million shares, paying about $10.50 per share. In fact, it even took out a $10 million loan last November to acquire a chunk of shares held by investment partnership ML-Lee. That investment has paid off handsomely.

BUSINESS DESCRIPTION

The fourteenth largest U.S. furniture manufacturer based on FY96 sales, Stanley was founded in 1924 and targets the upper-medium price range of the residential market. Its marketing theme? "We Just Look Expensive."

The firm makes a diversified line of furniture, with offerings in all major design styles. Sears, J.C. Penney, Rhodes, Rooms to Go, Haverty's, and Nebraska Furniture Mart are some of the vendors carrying Stanley products.

The company has three million square feet of manufacturing space in facilities located in Stanleytown, Virginia, and Robbinsville, Lexington, and West End, North Carolina. On August 7, it announced plans to phase out its upholstered product line, which accounted for just 3% of sales in the first half of '98.

As of the latest proxy, insiders owned 12.5% of the stock, with most held by Chair/CEO Albert Prillaman. The stock split 2-for-1 on May 15.

FINANCIAL FACTS

Income Statement
12-month sales: $232.4 million
12-month income: $12.9 million
12-month EPS: $1.56
Profit Margin: 5.6%
Market Cap: $158.1 million
Enterprise Value: $201.9 million

Balance Sheet
Cash: $1.5 million
Current Assets: $86.2 million
Current Liabilities: $37.1 million
Long-term Debt: $45.3 million

Ratios
Price-to-earnings: 12.6
Price-to-sales: 0.68
EV-to-sales: 0.87

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Though sales increased just 10.3% a year between FY95 and FY97, gross margins improved from 21% to 24.7% even as operating expenses declined. Stanley was leveraging its operations, and net income soared from 2.2% to 5.5%.

Screening for stocks with rising margins and even minor sales growth, you might have found Stanley. Stock repurchases in December of 1996 and June and November of 1997, with the resulting acceleration in EPS, might have given one even more conviction that this manufacturer was building another double.

Besides, with the housing and home improvement industries booming along with the economy, investors should have been combing the home furnishings sector for opportunities.

WHERE TO FROM HERE?

Stanley's stellar earnings have led analysts to raise their consensus earnings estimates to $1.78 a share for FY98 and $2.05 for FY99. But the stock hasn't done much since mid-April when the Warburg Dillon Read analyst downgraded the stock to "neutral" from "outperform."

Insider sales in April and July by Prillaman and other executives suggest $24 a share looks pretty fair. Though the price-to-earnings ratio appears cheap compared to the 56% EPS growth furnished thus far in '98, earnings are pegged to rise just 15% next year as part of 18% long-term growth.

Nailing these numbers together, we could build a YPEG fair value of $37 over the next 18 months. But Stanley is fairly heavily leveraged now, with a debt-to-equity ratio of 0.79. Also, while sales are booming this year, the historical financials suggest this may be a product of record consumer confidence and a strong economy -- macro factors that might have peaked if the stock market finds itself on a rocky road.

Then again, continued strength in new housing starts and old home sales and the durability of Home Depot's (NYSE: HD) stock in the latest downdraft suggest that consumer spending on homes and home furnishings could remain robust. If so, Stanley's stock might just be resting.

-- Louis Corrigan
(TMFSeymor@aol.com)

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