Description

Bernard Chaus, Inc. (CHS) manufactures women’s clothes, which are sold mostly by department stores. Dillard’s and May Department Stores are CHS’s two biggest customers. I looked at the Chaus line of clothes at the local Dillard’s. They are nice, conservative, reasonably priced clothes, and Dillard’s was giving them a fairly good display area in the store.

Josephine Chaus, the wife of Bernard Chaus who died a while back, is the company’s CEO. Josephine owns 69.5% of the stock.

CHS’s fiscal year ends in June 30. CHS reported earnings of $0.40 per share in FY1999 and $0.28.share in FY1998. During the company’s 1998 fiscal year, the stock traded as high $21.25/share.

CHS stumbled during the last two quarters, and earnings for FY2000 were only $0.01/share. Because of this setback, Wall Street severely punished the stock, and now the bid price is 9/16 and the ask price is 5/8. (Management has a reasonable sounding explanation for why the setback is only temporary, but the Street has apparently lost faith.)

CHS IS RIDICULOUSLY UNDERVALUED AT $0.625

CHS has assets of $49.0 million (88% of which are current assets, and none of which are “bogus” assets like goodwill) and liabilities of $30.7 million, giving CHS a book value of $18.3 million. This comes out to $0.67/share book value.

CHS’s key off-balance sheet asset is a net operating loss (NOL) carryforward with a tax benefit valued at $37.2 million according to the FY1999 10K. (This amount is unlikely to have changed much because CHS hardly had any income in FY2000.) This comes out to $1.37/share.

If Josephine decided to sell the company, the rock-bottom price she is likely to fetch would be book value plus the value of the tax benefit of the NOL carryforward: $0.67/share + $1.37/share = $2.04/share.

As of today, the ask price for CHS stock is only $0.625/share. This means that the minimum takeover value of the company is 3.26 times the current share price! If Josephine shopped the company and negotiated a deal of $2.50/share, you would QUADRUPLE your money! (And with $180 million in sales per year, this would be a pretty good deal for the acquiring company.)

Catalyst

One can only hope that Josephine will sell the company so investors who buy in at this low price will make a huge profit. Of course that can’t be counted on. The other catalyst is how well the company does during the current year. A profitable year practically guarantees that the stock price will go up. The upside is a lot greater than the downside, because the stock can only go to zero (which is unlikely because the assets, including the NOL carryforward, are just worth too much), but I’ve outlined that $2/share is a conservative and reasonable upside expectation. If CHS earns $0.40/share this year like it did in FY1999, and the Street decides to value the company at a PE ratio of 8, and add the value of the NOL carryforward on top of that, then we get $4.43 share, which is SEVEN times the current share price. It could happen.