Description

Craftmade is involved in the design, distribution, and marketing of ceiling fans and lighting kits through a network of 1600 lighting showrooms and electrical wholesalers. In 1998 they acquired TSI for $11 million in cash and stock. TSI is engaged in the design, distribution and marketing of ceiling fans and lighting kits to mass retailers like Lowe's and Home Depot. Craftmade also owns fifty percent of Design Trends, LLC, which makes lamps and chandeliers designed by Patrick Dolan, and fifty percent of Prime/Home Impressions, LLC, which makes fan accessories.

James Ridings, 52, is the CEO of Craftmade. A 1999 Forbes article stated, "Riding's unshaken philosophy: The best way for a manufacturer to do well is to make sure your retailers do even better." In order to compete against larger brands Craftmade offers its retailers a better deal. Instead of the 20% margin they make on most fans retailers make a 45% margin on Craftmade fans. Craftmade takes models that are not selling back at full cost plus freight, while most companies charge retailers 25% of the original price. When Taiwan's currency gained in value in 1996, Ridings decided not to pass along a 10% price increase by suppliers. Earnings growth was flat from '95 to '96, EPS unchanged at .25. When the currency fell in 1997, Craftmade passed along an 8% price decrease to retailers.

The question arises, have these concessions resulted in any retailer loyalty or other advantages which Craftmade could leverage into financial performance? From 1992 to 2002 EPS has grown at a compound annual rate of 22%, and from 1997 to 2002 at 27%. Book value grew at a 19% clip over the last ten years and 18.5% over the last five. Return on Equity ranged from 18% to 30% over the ten year period, averaging 25%, and 26% over the last five.

Using the current PE of 14 (in the midrange of historic values) and an EPS growth rate of 19% (low by historical standards but in line with projections for '03 and '04) returns on investment shake out as follows:

Current Share Price: $14.49
Current EPS: $1.08
EPS Growth Rate: 19%
Payout Ratio: 25%
Projected PE: 14

Year EPS Dividend Basket Price Compound Return
2003 $1.29 $0.32 $0.32 $17.99 26.39%
2004 $1.53 $0.38 $0.70 $21.41 23.54%
2005 $1.82 $0.45 $1.16 $25.48 22.50%
2006 $2.17 $0.54 $1.70 $30.32 21.92%
2007 $2.58 $0.64 $2.34 $36.08 21.54%
2008 $3.07 $0.77 $3.11 $42.94 21.25%
2009 $3.65 $0.91 $4.02 $51.10 21.03%
2010 $4.34 $1.09 $5.11 $60.80 20.85%
2011 $5.17 $1.29 $6.40 $72.36 20.70%
2012 $6.15 $1.54 $7.94 $86.10 20.57%

The lighting industry is an $18 billion market, the ceiling fan industry a $1.5 billion market. Craftmade's total revenues are on the order of twenty million dollars, so it has ample room to grow as it has in the past. The company is engaged in a buyback program and pays a dividend yield of about two percent. From 1999 to 2002 the company reduced shares outstanding by 20%. A number of its ceiling fan models have been named "Best Buys" by Consumer's Digest.

Issues and Reservations

1. The company purchases its products from suppliers in Taiwan (Craftmade) and Hong Kong and the rest of Asia (TSI). These products are shipped into west coast ports, and therefore the company is affected by labor problems in those ports. During the recent strike they were able to supply their retailers with the inventory they had on hand, but any strike of longer than three to four weeks would have adverse affects on business.

2. The company sells its products both in the new construction market and the renovation/remodeling market. As the table below shows, there is no tight correlation between new housing starts and the company's financial performance, but of course a major downturn in new home construction would affect the growth of Craftmade.

3. There is a risk involved in the concentration of suppliers, and after the TSI acquisition, a concentration in retailers. Craftmade buys much of its merchandise from two Taiwanese manufacturers, Fanthing and Sunlit. Although Craftmade distributes its products through a large network of retailers, TSI sells through mass merchandisers, two of which accounted for 71% of TSI's 2002 sales and 23% of the entire company's.

What follows is a table of financial data for the ten year period 1993 - 2002. Some notes: BV/s is book value per share. THS is total housing starts (multifamily and single family). Craftmade's fiscal year runs to the end of June, and the housing data is for calendar years.

EPS PE BV/s ROE Div THS
2002 1.03 14.76 3.81 30% .28
2001 .79 14.18 3.02 27% .25 1,601,900
2000 .63 10.71 2.74 21% .10 1,568,600
1999 .76 17.11 3.16 29% .08 1,641,200
1998 .46 25.36 2.03 25% .08 1,617,000
1997 .31 11.11 1.63 20% .05 1,474,000
1996 .25 12.44 1.47 18% .04 1,476,900
1995 .25 14.22 1.29 20% .04 1,354,200
1994 .31 12.81 1.21 30% .02 1,457,000
1993 .21 20.91 .89 27% --- 1,287,700

Our opinion is that Craftmade offers good risk reward at these levels. The company is small and comes with a number of risks, but has a proven track record of performance, a management trying to improve shareholder value through buy backs, and a small dividend.

Catalyst

Long term value play.