FLEXSTEEL INDUSTRIES (NYSE: FLXS)
Analysts: Ari Lazar and Michael Migut
Presented November 3, 2015
Company Overview
Flexsteel Industries (FLXS) is a home furnishings company that imports, manufactures, and markets residential and commercial furniture products within the United States. Their business model features three main revenue channels which include selling to major retail outlets such as La-Z-Boy and IKEA and also directly to consumers via their website. They have several brick-and-mortar stores around the country as well. Despite minimal name-brand recognition, Flexsteel is known for having high quality upholstered and wood furniture made individually by hand; product uniqueness and customer individuality are attributes that Flexsteel embraces in order to try and differentiate itself from its many competitors. Most of their products feature their proprietary steel drop-in seat spring that prevents the often "sinking feeling" that customers tend to experience with aging furniture.
Current Price / Current P/E / DIV Yield / Sales Growth past 5 years / 52 Week Range$43.93 / 14.69 / 1.64% / 7.40% / $27.25 – $46.28
Industry Overview
The furniture industry is highly competitive due to product saturation, relatively moderate barriers to entry, and the large number of furniture manufacturers that exist both domestically and abroad. There are no clear market dominating firms, but the key points of distinction between many of them have to do with the style, quality, delivery, service, durability, and price of their product offerings. This industry also relies heavily on disposable income of customers as people are more likely to buy new furniture when they are experiencing favorable economic conditions at home. Also the bottom lines of these firms are heavily reliant on commodity prices, especially with regards to wood and steel as these are the key ingredients in many of the products sold on the market today.
Financial Analysis, Projection and Valuation
Flexsteel had an average return of about 24% over the past 3 years. The company has no debt on its balance sheet and sales have grown consistently around 7.4% over the past 5 years. They blew past their 3Q2015 earnings estimates this past month. Based on a technical analysis, Flexsteel's current stock price is well above its 20 day and 200 day moving averages, which is a bullish indicator of strong price momentum. Also, its 20 day moving average just exceeded its 200 day moving average, which is also a very bullish technical sign as well. We have projected Flexsteel to grow their revenue by about 6.50% % next year and determined the discount rate for a discounted cash flow analysis to be 10.19%. For the comparable company analysis, we compared Flexsteel to Bassett Furniture Industries, Ethan Allen, Hooker Furniture, La-Z-Boy Inc., Mohawk Industries, Leggett & Platt Inc., Nova Lifestyle, and Tempur Sealy International.
DCF / Comparable / Target Price$43.57 / $69.58 / $56.58
Risks
The risks associated with Flexsteel include, but are not limited to, a loss of market share to larger retailers, potential product liability lawsuits if injuries arise (unlikely), effects of foreign political issues on imported goods with respect to government quotas and tariff regulations, changes in commodity prices and discretionary income, and fluctuations in the number of home purchases that would require new furniture.
Recommendation
We believe that Flexsteel is currently undervalued and that we should buy 500 shares at the market price. The combination of no debt and a steady business model has allowed the company to withstand the test of time since 1929 and pay a dividend for 295 consecutive quarters. Flexsteel has strong organic growth opportunities ahead.