Flexsteel Industries Inc.
BY ARI LAZAR AND LERISSA LI
FEBRUARY 23, 2016
Agenda
Business Overview
Company Profile
Macroeconomic Overview
Industry Outlook
Financial Analysis
Projections
Valuation
Stock Market Prospects
Recommendation
Business Overview
“ Incorporated in 1929, Flexsteel is one of the oldest and
largest manufacturer, importer and marketer of residential
and commercial upholstered and wood furniture products in
the United States. ”
Trademarks and Patents: Flexsteel Seat Spring, convertible beds
Manufacturing Facilities: Arkansas, California, Georgia, Iowa,
Mississippi and Juarez, Mexico
Distribution Facilities: California, Indiana, Iowa, Kansas, Pennsylvania
Sales Breakdown
Distribution Channels: 1,200 retail stores, hundreds of companyowned trucks, unparalleled logistical precision
3 new facilities in last quarter in Indiana, Pennsylvania, and Kansas
Residential 84%
Sources: Company 10K and Company Website
Commercial 16%
Company Profile
NASDAQ: FLXS
Current Price: $41.53
52 Week Range: $27.25 - $48.67
Realized Rate of Return
Feb 25, 2011 – Feb 22,2016
Market Cap: $314.08M
P/E Ratio: 13.54
Forward P/E: N/A
Dividend Yield: 1.80%
EV/Revenue: 0.60x
EV/EBITDA: 8.30x
Sources: Yahoo Finance and Google Finance
FLXS
NASDAQ
Company CEO
Karel Czanderna
Became 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
VP and General Manager of Portrait Photography Business at
Eastman Kodak
Helped renovate technology to create new industry standard
VP of Cooking Products and Outdoor Kitchens at Whirlpool
Responsible for KitchenAid, Maytag, and Whirlpool branded
appliances
Largest all-kitchen product launch in history of major appliance
industry
Source: Bloomberg
Macroeconomic Overview
U.S. Fixed Mortgage Rate
Sources: Mortgage-X-.Com, Nasdaq.com, and Avondale.com (Avondale Asset Management)
Porter’s Five Analysis
Threat of
New Entrants
• Moderate
• Simple industry
• Scaling buffer
Rivalry
• Moderate/High
• Minimal product
differentiation
• Product saturation
Threat of
Substitutes
Household
Furniture
Manufacturing
Buyer
Bargaining Power
• High
• Minimal product
differentiation
• Substitute threat
• High
• Substitute: Second
hand furniture
Supplier
Bargaining Power
• Low
• Many offshore
suppliers of
raw materials
Industry Outlook
The Household Furniture Manufacturing industry is cyclical
 As household incomes rise, US furniture manufacturers will leverage their competitive advantage in
producing high-end goods
Industry manufacturers are expected to delve deeper into furniture customization over the next five
years as a potential competitive advantage over foreign manufacturers
Industry Revenue Outlook
( $ in Million)
$24,800
$24,400
$24,000
$23,600
$23,200
$22,800
$22,400
2016
Source: IBIS World
2017
2018
2019
2020
2021
SWOT and Risk Analysis
Strengths
• Hand made products
• Blue Steel Spring Patent
• No debt, high liquidity
• 3 new distribution
centers
• Long term outlook
• Logistics network
Opportunities
• Few regulations
• Constant innovation
• Online sales growth
• International Expansion
• Increase in home buying
(low interest rates)
• Low commodity prices
Weaknesses
• Limited pricing power
• Competitors can copy
products quickly
Threats
• Potential increase in price
of raw materials (wood,
steel)
• Higher competition from
large retailers
• Increased restrictions on
trade
• Economic Slowdown
Business Risks

Loss of market share to larger retailers

Product liability if personal injury occurs

International operation risk

Exchange rate risk

Changes in commodity prices (Lumber)
Financial Analysis
Profitability
25.0%
20.0%
4.0x
15.0%
3.0x
10.0%
2.0x
5.0%
1.0x
0.0%
0.0x
2013
2014
Gross Margin
2015
LTM
Profit Margin
Greenblatt
13.0%
11.0%
9.0%
7.0%
5.0%
2013
2014
Return on Invested Assets
Liquidity
5.0x
2015
LTM
EBIT/EV
2013
2014
Current Ratio
2015
LTM
Quick Ratio
DuPont Analysis
DuPont Analysis
2013
2014
2015
11.9%
LTM
ROE
8.7%
9.0%
11.7%
Tax Burden
63.0%
63.0%
62.7%
62.7%
Interest Burden
103.0%
106.8%
103.3%
101.8%
Operating Margin
5.2%
5.1%
7.4%
7.5%
Asset Turnover
2.0x
2.1x
1.9x
2.0x
Equity Multiplier 1.3x
1.3x
1.3x
1.3x
Relative Financial Analysis
18.0%
16.0%
14.0%
Bassett
12.0%
Ethan Allen
10.0%
Hooker
8.0%
La-Z-Boy
Leggett & Platt
6.0%
Nova Lifestyle
4.0%
Flexsteel
2.0%
0.0%
Return on Invested Assets
*Ratios are based on companies’ LTM figures
EBIT/EV
Technical Analysis
Source: Yahoo Finance
Key Assumptions
Discount rate
DCF
Comparable Company Analysis
Industry Comparable Stats
Source: Morningstar
Stock Market Prospects
Attractive Growth Prospects
Low interest rates
3 new distribution centers
Graham implied growth rate
Modernizing business systems
Strong Growth, Profitability, and Returns (ROE, ROIC, ROA)
Mispriced by Market
Long Term Outlook
 Management focuses on growth and efficiency not hitting quarterly numbers
No Debt
 3 Competitors with no debt also have below average comps
Low Analyst Coverage
 Only two analysts asked questions on their earnings call
Huge Discount to Peers
Portfolio Holdings Analysis
Company
Industry
Abbott Laboratories (ABT)
Medical Appliance & Equipment
AbbVie, Inc. (ABBV)
Drug Manufacture
Air Lease Corporation (AL)
Rental & Leasing service
Cal-Maine Foods, Inc. (CALM)
Food
Capital One Financial Corp. (COF)
Credit Service
Jack Henry Associates (JKHY)
Business Software
The Goodyear Tire & Rubber Company (GT)
Rubber plastic
Union Pacific Corporation (UNP)
Railroads
Walgreens Boots Alliance (WBA)
Drug store
Zix Corporation (ZIXI)
Application software
Flexsteel operates in the Home furnishings & Fixtures industry, which has little correlation with the current
holdings in our portfolio.
Recommendation
Buy 300 Shares of Flexsteel Industries Inc. (FLXS) -NasdaqGS
@ Market Price
Implied Price
Weight
DCF Valuation
Relative Valuation
$48.61
$55.70
50%
50%
Target Price
$52.16 (26% Premium)
Current Price
$41.53