A "Crafty" Selection
10/28/2005 12:00 am EST
Many advisors offer a cursory glance at many stocks. Nancy Zambell, however, focuses on providing a monthly, in-depth fundamental analysis of a single new recommendation, uncovering exciting and underfollowed special situations. Here’s her latest.
"Rising rates continue to place downward pressure on housing stocks. Yet builders and the construction-related, home-improvement industries continue to rack up impressive sales and earnings gains as the housing market speeds ahead. We are not finished with this housing rally, by a long shot. Consequently, I'm doing some bottom-picking in the construction and construction-related sectors.
"Craftmade International (CRFT NASDAQ) is a leader in the rapidly expanding ceiling fans and home lighting markets Since 1985, Craftmade has been selling ceiling fans, light kits, outdoor lighting, bathstrip lighting, and related accessories to the remodeling, new home construction, and replacement markets. More than 2,000 lighting showrooms and electrical wholesalers (out of 5,000 in the entire industry) across the country carry Craftmade's fan and lighting products. And the company's Trade Source International (TSI) division covers sales to mass merchandisers.
"I can still remember the very first ceiling fan I bought, some 20 or so years ago in Florida. My choices were white or brown. Today, Craftmade offers more than 127 models with 100 compatible lighting fixtures, five motor sizes, five blade sizes, and two dozen finishes. What a choice! These fans alone comprise 29% of the company's annual revenues. Right now, the ceiling fan market is a $1.5 billion marketplace, and growing. The lighting industry brings even more opportunities, with $18 billion in annual sales.
"Craftmade leverages its success by constantly introducing and acquiring new products. Its TSI division recently launched a window-covering program, which has seen a great beginning. Already, 53 Lowe's stores have ordered the products with another 50 due to come on line by early 2006. And last year, it acquired the Teiber collection, which distributes more than 3,000 different light bulbs and complimentary lighting products, as well as an extensive line of door chimes and pushbuttons. Who knew you could buy 3,000 different light bulbs?
"The outlook for Craftmade is tremendous just for products sold for new homes. But add the growth in the home remodeling industry and you have a fabulous opportunity for expansion. Home remodeling accounts for 40% of all residential construction and improvement spending. Baby boomers spending, low home mortgage rates, and increased home ownership, and the overall proliferation of the do-it-yourself stores, along with those addictive shows on HGTV, have all have spurred fantastic growth in the industry.
"The company's product quality is superb, illustrated by one of the lowest return rates in the industry. Last year's financials were under par, mostly due to acquisitions and higher marketing costs, but this year, the company is expected to be back on track with rising sales and earnings. Craftmade has been whittling down those expenses, increasing its gross margins from 29.6% to 30.4%. I like to see that, as it means more money falling to the bottom line. And the company is generating excellent free cash flow due to minimal overhead and capital expenditures.
"Craftmade has made the Forbes 200 Best Small Company list eight times since 1990. And the stock is very undervalued, in relation to its peers. Overall, it has a proven track record of pioneering new product design, premier distribution channels to mass merchandisers and specialty retailers, a fabulous opportunity to expand private label business, and a history of accretive acquisitions. There is strong insider ownership of 25% of the company's shares and the firm remains undiscovered by Wall Street with minimal analyst coverage. Buy up to $20, and keep in mind a stop-loss of 20% less than your purchase price."