Craftmade (NASDAQ:CRFT), a maker of ceiling fans and lighting kits, was recently highlighted by Tom Gardner as a worthy mention in his Hidden Gems Watch List. The company has since performed a belly flop in its latest quarterly results -- not to be outdone, its stock also took a 25% nosedive. Is it lights out, or is there a bright future for Craftmade?
After the company released its fiscal 2005 first-quarter report, its stock immediately took a whacking because of weaker than expected results and the sudden resignation of the chief financial officer. Analysts were expecting the company to earn $0.45 per share; Craftmade, however, pulled in a dim $0.27. Its quarterly earnings of $1.4 million were well off the $2.4 million in net income from the same period a year ago.
Poor performance from its design trade lighting unit, as well as regulatory costs associated with the Sarbanes-Oxley Act, were identified as primary culprits. The Sarbanes-Oxley expense alone cost the company $0.10 per share for the quarter. And the design trade unit was critically affected by Lowe's (NYSE:LOW) move to reduce inventory levels -- Lowe's is its largest customer, followed by Wal-Mart (NYSE:WMT).
Are these one-time problems? There will always be Sarbanes-Oxley expenses, but most of the costs are one-time charges that have already been incurred. The design trade situation is more difficult to nail down, and unfortunately, the heavy dependence on Lowe's will always require investors to maintain a significant margin of safety.
Not all was negative, as the company and its shareholders continue to benefit from the share repurchase program. In December 2003, the company announced a buyback program of up to 500,000 shares. For the quarter, Craftmade purchased 50,333 shares at an average cost of $19.79 -- its stock is near $18. To date, the company has purchased 381,643 shares and recently said it intended to buy more if the stock price remains at this level.
With the company buying back its own shares, is it time for investors to take the plunge? Craftmade's enterprise value (EV) of $82.2 million is 10.3 times its trailing 12-month (TTM) structural free cash flow (SFCF), which is $8 million. In the quarterly report, the company reaffirmed its earnings-per-share growth expectation of 10% to 15% for fiscal 2005. Given this, the company appears to be reasonably valued.
While it's not lights out for the company, the quarterly challenges may have dimmed investor enthusiasm. As Craftmade continues to pursue a bright future, investors will need to monitor its progress -- keeping the stock on a watch list.
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Fool contributor Jeremy MacNealy does not own shares in any of the companies mentioned.
