flexsteel industries inc. by ari lazar and michael migut november 3, 2015

Flexsteel Industries Inc.

BY ARI LAZAR AND MICHAEL MIGUT

NOVEMBER 3, 2015

Agenda

Introduction

Macroeconomic Overview

Business Overview

Stock Market Prospects

Industry Overview

Financial Analysis

Projections

Valuation

Recommendation

Introduction

Current Price: $44.39

Industry: Furniture/Home Furnishings

P/E Ratio: 14.50

52 Week Range: $27.25 - $46.10

Dividend Yield: 1.74%

Headquarters: Iowa

Incorporated in 1929

Target Market: United States

Sources: Google Finance and Bigcharts.com

Macroeconomic Overview

Interest Rates in the US

Sources: Mortgage-X-.Com, Nasdaq.com, and Avondale.com (Avondale Asset Management)

Business Overview

“The Company operates in one reportable segment, furniture products. Our furniture products business involves the distribution of manufactured and imported products consisting of a broad line of upholstered and wooden furniture for residential and commercial markets. Set forth below is information for the past three fiscal years showing the Company’s net sales attributable to each of the areas of application” Sales Breakdown

Residential 84%Commercial 16%

• Focus on both B2B and B2C sales

• “The Company operates manufacturing facilities that are located in Arkansas, California, Georgia, Iowa, Mississippi and Juarez, Mexico”

Sources: Company 10K

Porters 5

FLXS

Threat of New Entrants

• Moderate• Simple Industry• Scaling buffer

Threat of Substitutes

• High• Elastic Demand

for Product

Supplier Bargaining Power• Low

• Many suppliers of raw materials

Buyer Bargaining Power

• High• Many

Substitutes

Rivalry• Moderate/High• Minimal Product

Differentiation• Product

Saturation

SWOT Strengths• Hand made products• Blue Steel Spring• No debt, high liquidity• 2 new distribution

centers• Long Term Outlook

Weaknesses • High transportation

costs• Limited pricing power• Competitors can copy

products quickly

Opportunities• Few regulations• Constant innovation• Online sales growth• International Expansion• Increase in home buying

(low interest rates)• Low commodity prices

Threats • Potential increase in

price of raw materials (wood, steel)

• Higher competition from large retailers

• Increased restrictions on trade

• Economic Slowdown

Risks Loss of market share to larger retailers Product liability if personal injury occurs Effect of foreign political issues on imported goods (suppliers) Government quotas/tariffs Dollar appreciation Changes in commodity prices (wood)

Source: Flexsteel Industries, Inc. Form 10-K. June 30, 2015. United States Security and Exchange Commission.

Industry OverviewGlobal Supply Chain

Heavy reliance on offshore suppliers

Very CompetitiveDesign patents are NOT common

Cyclical Industry

Low Market DominanceMany small manufacturers

Style, Quality, Price, Durability, Delivery

Minimal Product Differentiation

Product Saturation

Source: Flexsteel Industries, Inc. Form 10-K. June 30, 2015. United States Security and Exchange Commission.

2012 2013 2014 2015 2016$0

$1,000

$2,000

$3,000

$4,000

$5,000

Design Expenditures

in th

ousa

nds

Technical Analysis

Source: Bigcharts.com

Karel CzandernaBecame CEO July 2012

100% increase in stock price

Harvard Business School

B.A. Physics from Clarkson University

PHD Materials Science and Engineering from Cornell University

President of Building Materials Division of Owens Corning Company

VP and General Manager of Portrait Photography Business at Eastman KodakHelped renovate technology to create new industry standard

VP of Cooking Products and Outdoor Kitchens at WhirlpoolResponsible for KitchenAid, Maytag, and Whirlpool branded

appliancesLargest all-kitchen product launch in history of major appliance

industrySource: Bloomberg

Stock Market Prospects

50 New Galleries and 2 New Large Distribution Centers

No Debt

Modernizing Business Systems to Improve Efficiency Aiming to be a one stop shop for furnishings to help customers cut out suppliers

Petrovsky Score

Long Term Focus

Earnings Transcript Q1 2016

Financial Analysis

Income Statement Projections

Discount rate

DCF

Comparable Company Analysis

Comparable Company Analysis

Industry Comparable Stats

Source: Morningstar

Thesis

Attractive Growth Prospects Low Interest Rates2 New Distribution CentersGraham Implied Growth Rate

Strong Growth, Profitability, and Returns (ROE, ROIC, ROA)

Mispriced by MarketLong Term Outlook

Management focuses on growth and efficiency not hitting quarterly numbers

No Debt 3 Competitors with no debt also have below average comps across the board

Low Analyst Coverage Only two analysts asked questions on their earnings call

Huge Discount to Peers

Recommendation Valuation

◦ DCF: $43.57 (50%)◦ Comparable Company Analysis: $69.58 (50%)◦ Current Price: $44.39◦ Price Target: $56.58

Recommendation: Buy 500 Shares Flexsteel Industries Inc. (FLXS) -NasdaqGS @ Market Price