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Flexsteel Industries Inc.
BY ARI LAZAR AND MICHAEL MIGUT
NOVEMBER 3, 2015
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Agenda
Introduction
Macroeconomic Overview
Business Overview
Stock Market Prospects
Industry Overview
Financial Analysis
Projections
Valuation
Recommendation
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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
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Macroeconomic Overview
Interest Rates in the US
Sources: Mortgage-X-.Com, Nasdaq.com, and Avondale.com (Avondale Asset Management)
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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
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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
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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
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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.
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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
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Technical Analysis
Source: Bigcharts.com
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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
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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
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Financial Analysis
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Income Statement Projections
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Discount rate
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DCF
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Comparable Company Analysis
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Comparable Company Analysis
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Industry Comparable Stats
Source: Morningstar
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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
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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