Hooker Furniture (Nasdaq: HOFT)
Trading at $22.75 as of 2/6/04

This article is part of our annual Stocks Fools Love Valentine's Day special.

For Valentine's Day, I'll present a company that allows you to snuggle in style. Motley Fool Hidden Gemspick Hooker Furniture(Nasdaq: HOFT) is a family-run operation that was founded back in 1924, and it has all the things you like to see in a business, including a modest valuation.

Based in Martinsville, Va., Hooker manufactures furniture for the bedroom and home office, as well as dining, casual, and entertainment areas. Customers include such heavyweights as Berkshire Hathaway's(NYSE: BRK.A) Nebraska Furniture Mart, Neiman Marcus(NYSE: NMG.A), Federated Department Stores(NYSE: FD), and Dillard's(NYSE: DDS). But unlike many small caps, this company isn't overly reliant on one or two major buyers; no single purchaser makes up more than 3% of its annual sales.

It also has a good relationship with its 2,000 employees who, along with management, own more than 50% of the stock. When Tom Gardner recommended Hooker in last August's Hidden Gems, he noted that the business is moving toward higher-quality and higher-priced products and was importing more from foreign manufacturers. These are moves that should increase margins in the future, and show that management is willing to make tough economic decisions for the benefit of long-term outside and employee owners.

The company also shows strength in its flexibility. It puts its product lines through a detailed review twice a year, and gets rid of those that are lagging and not creating enough value. This process enabled it to quickly adjust to increased demand for second home, home office, and home entertainment center furniture.

No company is without risk, of course, especially the small-cap variety. Hooker's investors should keep an eye on its relationship with foreign manufacturers. Along with such well-known brands as La-Z-Boy(NYSE: LZB) and Bassett Furniture Industries(Nasdaq: BSET), Hooker recently pressed for tariffs on bedroom furniture sold in the U.S. by the very Chinese manufacturers who make many of its products! So far, its Chinese partners haven't withheld goods from Hooker, and we can only hope management doesn't make any more such questionable decisions.

The company recorded $309 million in sales in fiscal 2003, a 24% jump over the previous year. That figure was boosted by the acquisition of Bradington-Young, a maker of upscale leather reclining chairs. Earnings for the full year dropped 6% to $2.56 per share, thanks in part to restructuring and asset impairment charges related to the closing of its Kernersville, N.C., facility.

As usual, however, the free cash flow (FCF) picture provides us with a better view of the business' real profitability. After dipping into negative territory in 2002, the company generated $37.2 million in FCF last year, or $6.06 per share.

When Tom selected the stock in August, it was trading at a very reasonable 8.6 times 2003 estimated FCF of $22 million. But, as I just mentioned, the business actually churned out $37.2 million in FCF, and the price has climbed 60% since his recommendation. At $21.70 (after a January split), it now sits at just 7.2 times trailing FCF. Factor in Tom's conservative 13% growth estimate, and you see the stock still seems undervalued even after its recent run.

Hooker for Valentine's Day? Why not?

Rex Moore is a hidden gem in his own right. If you're interested in Motley Fool Hidden Gems, you can take a free trial. The Motley Fool has a disclosure policy.

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