Furniture industry lacks necessary polish for a Contra buy

Benj Gallander and Ben Stadelmann
Wednesday, September 20, 2006

Our modus operandi is to cosy up to the unloved, the forgotten, the repulsed, especially when those stocks are in woebegone sectors. A couple of classic buys were made in the fall of 2002, when the Japan Equity Fund and KLM Royal Dutch Airlines, now merged with Air France were purchased. Lots of people were wondering if we had lost our sanity, given that Japanese stocks had been brutalized for better than a decade and the airline arena was crushed by 9/11. Of course, that was assuming that we were sane to begin with.

Fortunately, both turned out swimmingly. JEQ was dispatched after a three-year hold and 59 percent gain. Air France remains in the portfolio and is currently up about 250 percent. Not bad for embracing the loathed.

With the NYSE and TSX not far from historical highs, finding out-of-favour sectors is difficult, but one that sticks out like pins on a pincushion (slivers on a railing?) is furniture manufacturing. Competition from China has left many firms threadbare, including three Canadian outfits that have crossed our radar screen: Amisco, Bestar and Shermag.

Not long ago, all were thriving. As recently as 2004, Amisco had revenues over $49 million and paid a dividend of 40 cents. Net earnings were $2.4 million, equivalent to 62 cents per share. Management maintained a stellar balance sheet and was on top of events in the marketplace. However, despite their best efforts, sales for the first six months of this year tumbled to $18.1 million, replacing yesteryear’s healthy profits with a slight loss. Say “bye-bye,” dividend.

In 2004, Shermag had sales cresting $250 million with earnings better than $17 million. The first quarter of this year reflected sales of $45.8 million with a loss of a tad less than $4.4 million.

Bestar has been in decline longer than the other two, with sales of almost $76 million in 2000, and earnings of $3.4 million. Revenues for the first two quarters of this year were just north of $15 million, accompanied by a $1.7 million loss.

The stock prices of all three have cratered. Amisco, Bestar and Shermag reached peaks of $10.34, $4.50 and $16.30 respectively since the year 2000. Now they are at the $1.35, $0.25 and $2.70. However, even at these prices, we are not tempted to take the buying leap.

Besides the simple fact that this sector remains unattractive to us, a major problem in terms of purchasing either Amisco or Bestar is the diminutive volume, with both averaging fewer than 4,500 shares traded per day over the last three months. Shermag, on the other hand, trades about 45,000 shares per day, making it a more realistic Contra candidate at some point.

A primary reason that all of these companies are in survival mode is the low value of the Chinese yuan. This gives Chinese-made goods an unfair advantage, which is driving parts of the Canadian industrial infrastructure into bankruptcy. When the yuan is finally adjusted upward, Canadian firms will have their competitive position boosted. If they can survive that long.