If there's a time to buy something cyclical, like a furniture maker, it's when the going is tough, not smooth. After perusing the latest bits of news and financials from Italian leather outfitter Natuzzi (NYSE: NTZ ) , I'm seriously considering putting my trusty nose-picker on the buy button.
Sure, the company recently announced that it expects sales to be flat for 2007, and profits around breakeven.
But a look at the almost-as-recent earnings results shows, a company that's got greater potential than management's 2007 prognostication might imply. For 2006, net sales were up 9.8% and operating profit came to 16.5 million euro, reversing last year's loss. Most important for this investor was cash generation by operations, which came to 66.9 million euro, nearly tripling last year's 23.2 million euro. Pulling out capex, we're left with a company that produced about $62.5 million in free cash flow. And it's trading at an enterprise value of only $292 million.
That looks pretty slick to me. Except, of course, for the slowdown in the home fetishism on our shores and the related drop in furnishings demand. The malaise that's crushing homebuilders like Toll Brothers (NYSE: TOL ) and Hovnanian (NYSE: HOV ) is already hitting the furniture space, too. Ask the folks at La-Z-Boy (NYSE: LZB ) , Stanley (Nasdaq: STLY ) , or Hooker Furniture (Nasdaq: HOFT ) .
Reduced home spending was already pushing the trend down in Natuzzi's U.S. business by Q4, but therein we find the trick to investing in cyclical businesses like these. Do you buy when biz is good, or when it isn't? If you want to make money, the answer is usually "when business is down, and the share price, too."
We've got the downdraft in business on the horizon for Natuzzi, but the share price hasn't dropped into brainless bargain range yet. Still, if the slowdown allows Natuzzi to work through that inventory and keep generating cash, the firm might just be cheap enough.
For more on the trials and tribulations of furniture makers, check out:
A former resident of the Beautiful Boot, Seth Jayson is a member of the
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La-Z-Boy is a
Motley Fool Income Investor
recommendation. Hooker Furniture and Stanley Furniture are both
Motley Fool Hidden Gems
recommendations.
At the time of publication, Seth Jayson had no positions in any company mentioned here. See his latest blog commentary here. View his stock holdings and Fool profile here.
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