Description

Decorator Industries is a small cap company that first came to my attention when Scott Black recommended it in Barron’s in Feb ’03. Decorator sells drapes, curtains, blinds, pillows and all kinds of furnishings to the manufactured housing industry, recreational vehicle manufacturers, and hospitality market.
Decorator has a strong balance sheet and the ability to generate free cash as I will show below. Decorator celebrated its 50th year of business in 2002. At the time of the Barron’s article the stated book value was $5.07 (minus goodwill it was $4.16). The number of shares outstanding is just over 2.8 million. In looking closer at the company I was also impressed that the company had bought back shares over the years and reduced the share count by 35% in the last 20 years. In today’s stock option crazy market it is nice to see a company that appears to be looking out for the shareholders. If you look at the company’s website and annual reports, you may feel like you have gone back in time. There are no worries here regarding corporate jets or Fannie Mae pension plan giveaways.
Management is extremely tightlipped and there are no analysts that follow the company.
Let’s start with a brief summary of the industries that Decorator operates in:

Manufactured Housing:
This industry has declined significantly since 1998 due to excess inventory, an overabundance of retail locations, and lax lending standards (which resulted in an up tick in repossessions and delinquency rates).
Current demand in the industry is still low but finally appears to be stable. Credit availability is still an issue. With Berkshire Hathaway stepping forward last year and buying Clayton Homes (Clayton bought Oakwood in ’04), Buffett must believe in the viability of the industry.
In 1998 Manufactured Housing represented 60% of Decorator’s sales and today that number is down to 20%.

Recreational Vehicles:
Unlike the Manufactured Housing Industry, the RV market has grown dramatically since 1998. This can primarily be attributed to low interest rates and favorable demographics.
This industry represents 60% of Decorator’s sales.

The Hospitality Industry:
This industry (Hotels/Motels) represents the remaining 20% of sales. The principal source of business is the refurbishing of rooms. Decorator focuses on the lower to middle end of the industry.

Since the Barron’s article 11 months ago, there have been some significant changes to the company.
1) The acquisition of Fleetwood Enterprises drapery operation. This enables Decorator to expand its relationship with Fleetwood and also makes Decorator the exclusive supplier to Fleetwood in certain products. The asset is being amortized over 6 years. If the agreement is extended an additional three years (likely), then the amortization period will be nine years.
2) Purchased a manufacturing facility in Phoenix. A positive financial contribution should be realized in 2005 from this expenditure. The facility will eventually service their west coast Fleetwood business and allow them a better platform to go after other west coast customers.
3) Expanded their building in Indiana which makes pleated shades. This expansion will increase their capacity in this location by 50%.

The results for the first nine months of 2004 have shown sales increasing by 12% (excluding the Fleetwood drapery operation) over 2003. EPS has grown to .47 versus .44 the year before. While the company does not make any forward looking statements regarding earnings, Decorator did earn .11 per share in last year’s 4th quarter.
To give you a rough idea of Decorator’s cash generating ability, let’s examine the following:

January ’04
Cash and Equivalents $3,991,631
Long Term Debt $1,926,832

October ‘04
Cash and Equivalents $114,032
Long Term Debt $1,795,245

During this timeframe, Decorator spent 3.9 million in cash for the Fleetwood acquisition, and 2.2 million for capital expenditures which include the Phoenix acquisition and the Indiana expansion.
With the company’s $5,000,000 line of credit remaining unused during this entire time period, Decorator has exhibited strong cash generating ability. Capital expenditures have averaged $800,000 per year over the past 10 years. In Scott Black’s mention in Barron’s he stated that the company generates over 1 million dollars a year in free cash (.35 per share). This looks very realistic and even conservative based on what has transpired this year.
So assuming that next year is a more normal year in regard to Cap Ex, the company should have ample free cash flow to buy back shares, increase the dividend (yielding 1.5% currently), or find more opportunities to grow the business as they did in 2004.

Risks:

Whenever I hear anything to do with manufacturing or textiles I think of the threat of cheap labor and China. This has not affected Decorator thus far due to customer’s short lead times, and the large number of patterns and pallet of colors required (the possible combinations are very high). Since the customers of Decorator can differentiate their products from competitors or even among their own product lines with different types of drapes or blinds, they have not shown the desire to look to China since this is a small cost in their overall product.

The other risk is that the R.V. market has been very strong compared to a decade ago and if this industry slowed it would be a negative for Decorator. Also with the drapery acquisition, Fleetwood accounts for over 30% of sales.

Catalyst

1) If the Manufactured Housing Industry can begin to resume decent growth, the upside for Decorator is substantial. Decorator earned around .80 per share in 1998 and that was with their other divisions not being anywhere close to as strong as they are today.
2) A strong cash generating company like this with a good balance sheet is always a possible takeover target. Robert Robotti owns around 550,000 shares (20%) of Decorator. He has aquired over 100,000 shares since August. He appears to just be a private investor that meets with management a couple times per year. He has been willing to buy shares above the price is currently trading so he might be a force one way or another to keep the stock price moving higher.