Description

The Italian furniture-maker Natuzzi is the world's leader in the production of leather-upholstered furniture and has a leading share of the market for leather-upholstered furniture in the United States and Europe.

Revenues have increased at a compounded average rate of nearly 20% per year over the past five years, with net income increasing at about the same pace over the period. Revenue growth over the past two years has slowed due to a deliberate plan by management to consolidate distribution, thereby laying the groundwork for greater future profitability.

Management has achieved a consistently high ROE over the past five years, averaging over 25% - all the more spectacular considering that this was done with essentially no debt!

The key ratios of Price to Earnings (7), Price to Sales (.96), Price to Book (1.82) are all at one-half to one-third of historical norms, and the share price is currently trading near a multi-year low and off nearly 50% from its 52 week high.

The company also has 180 million dollars cash, which it is proposing to pay out as an extraordinary dividend upon approval at the shareholder’s meeting at the end of April. I have written to the company suggesting that they use that cash to buy back their own shares on the open market rather than paying it out it the form of a (taxable!) dividend, as this would clearly create more shareholder value given the current low valuation of the shares. However, I am not sure whether Italian law allows companies to buy back their own shares.

If I had to try to guess why the shares are selling for such a low valuation given the fundamentals of the company, I would say that it is due to the same reasoning that has battered most retail stocks of late: The expectation that consumer spending will slow down as a result of interest rate rises by the Fed. Furthermore, the share is fairly illiquid and under-followed, so there hasn’t been much buying demand to offset the selling of those wanting to exit the stock. Nonetheless, I would suggest that at its current price, the selling has been overdone and the value at this price is compelling.

Catalyst

Nothing immediate. Just continued consistent performance by the company and an eventual recognition that this company is well managed, has a rock solid balance sheet and great products at reasonable prices.