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Natuzzi SpA Message Board

  • silverfox132 silverfox132 Sep 10, 2009 11:45 AM Flag

    What goes up for no reason...

    will fall even faster. shorting!

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    • Great comments from all

      One issue that has brought up and that is an interesting one is the issue of secular decline in the U.S. furniture business. Clearly the decline is cost-based as opposed to demand-based as is similar in the newspaper business (unless people plan on sitting on cardboard in the future). I believe that the best comparison is the electronic contract manufacturing business (ie. Celestica, Flextronics). Everyone thought the sector was dead because Foxconn had cheap Chinese labor and outbid on all contracts. Over time the industry moved production to cheaper locations and now will be on par with Foxconn in terms of bidding on new demand. A very similar situation appears to be brewing in the furniture business in the developed world. Chinese cost advantages will be narrowing at the same time new furniture plants in cheaper locations will be running at capacity (2011/12 timeframe??)

      In any event I loaded up on select furniture companies around less than 1x my estimates for normalized e.p.s. CRC and NTZ remain the two best bargains in the sector imho, at around 1.8x and 2.5x my normalized e.p.s. estimates respectively.

      Would be interested in others' thoughts.

    • The only thing I can offer is to look at normalized earnings.

      For example, a company such as LazyBoy, 10-yr average e.p.s. is about $0.80 area, and this is now what is expected for next year. The S&P 500 is now trading at 14x normalized earnings, which would put LazyBoy fair value at $11.00 area....the stock has traded close to $10.00/share up from $0.60

      In the case of NTZ things are not quite so cut and dry. Over the past 10-years Natuzzi has averaged about 0.93 Euros in cash flow per share. Also over the past 10 years NTZ has traded at an average of 9.65x price/cash flow. This would yield a recovery value of say $11.65 per share assuming 1.30 exchange rate. However my guess is that this recovery value will only be met if NTZ generates solid e.p.s. upon recovery. The area to focus on here is obviously cost cutting. While NTZ has been slow on the SG&A front (as one would expect in Italy), the company has actually been more aggressive than LazyBoy in lowering its capital investment in high cost regions (Italy) and moving into lower cost regions (Romania and China). Using normalize cash flow, and pre-tax depreciation (to allow for changes in working capital that I am not calculating), yields a recovery e.p.s. of from $0.50 to $0.60 per share depending on exchange rate. Using after-tax depreciation yields e.p.s. up to $0.85 per share at 1.46x exchange rate. At today's 14x normalized market multiple, all of this would imply a fair value of $8.00 to $12.00 per share.

      Looking at comparables and using enterprise value/revenue (which is the best metric in a cyclical recovery as earnings are often negative in the present sense) yields a median EV/Revenue of 0.43x. Companies I use are ETH, STLY, BSET, FBN and LZB. This median would place a fair value of around $8.00 today and up to $11.00 if the furniture sector continues to recover into 2010.

      Only time will tell, but given Mr. Natuzzi has a great deal of his net worth in the company, I would think a return to profitability on such a large revenue basis is probable. Whether the stock gets up into the $8.00 to $12.00 is anyone's guess, but I would certainly not short it here.

    • before you short, are you aware what is going on down in the "boot"?

      Finally, finally, finally after so many years the thing is going to be run for the benefit of the stock price... not just to maximize probability that Pasquale can maintain control of the company... about time (particularly with a debt-free EV less than current working capital....

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