Presented: 2/21/2017, Chuying Wang; Songlin Li

Crown Crafts, Inc. (NASDAQ: CRWS)

Presented: 2/21/2017, Chuying Wang; Songlin Li

We own 1000 shares purchased @ $9.37 on 5-10-2016

$7.30 as of 2-21-2017

Company Overview:

Crown Crafts, Inc., founded in 1957, operates in the infant and toddler products segment of the consumer products industry through its wholly owned subsidiaries –Crown Crafts Infant Products, Inc., which designs, markets and distributes infant and toddler products including bedding, blankets and other nursery accessories; andHamco, Inc., which designs, markets and distributes bibs, bath items and other accessories. Sales are generally made directly to retailers such as mass merchants, large chain stores, juvenile specialty stores, Internet retailers, wholesale clubs, grocery and drug stores, and catalog retailers.

Industry and macroeconomic overview:

Corwn survived in a mature industry with highly competition and heavy regulation for over 3 decades. Every time the consumer taste changes, CrownCrafts would got a hit first and catched up later with a new production line with higher revenue. From macro perspective, the US GDP, per capita disposable income and new births are increasing,which are good signals for Crown’s sales.

Financial analysis:

According to our financial ratio analysis, Crown Crafts keeps a high profitability around 10% every year in the past 6 years. The company has done well in its cost control by maintaining 73% revenue as COGS. We believe the profitibility trend will continue into the future. In addition, the liquidity ratio of the company continues to be strong and the company is holding enough cash to deal with a downturn in the future. The fiancial flexibility is also benefited from the company’s low/no debt policy. In a nutshell, the company is healthy from its financial statements. It has a strong management team with a lot of options in its pocket.

Valuation:

Sales forecasting is based on macro factors: the increase of new birth rate of the US, industry factors: pressure from retailers, the company’s unique risks: the expiration of contract agreement with Disney, and historical growth of Crown’s sales. Based on the forecasting of sales, we make several assumptions for the projection of B/S, I/S, and CF in the coming five years using historical average percentage to sales, latest data, historical growth rate and other unique methods. After figuring out projection of free cash flows, we discount them at a discount rate of 12%, which is calculated based on cost of equity(CAPM), historical return to shareholders and the firm’s unique risk premium. Then we obtain the implied price: $7.61, which is close to its current price.

Recommendation:

Firstly, fundamental analysis showsthe implied stock price of Crown Crafts is close to its current market price ($7.30 as of 2-21-2017) and the company now has many risk factors, such as concentration in just two retailers that are declining in sales, political risk to imports by president Trump and expiration of contract agreement with Disney in Dec 2017. Besides, from cash condition we see Crown doesn’t find good investment opportunities to use the cash and its sales increases very slowly.Secondly, technical analysis implies that money outflows from the stock, which is also a sign for sale. Furthermore,. Considering all the factors we mentioned, we recommend to sell 1000 shares at the market.