Description
MITY is reasonably valued with high ROE, good management, and a catalyst: after more than two years their "Gen4" table is about to launch. I refer you to Cogitator's January 2002 writeup for history and general business description. Since that time MITY rid itself of some ill-advised acquisitions, reversed the post-9/11 decline, got itself back into growth mode and developed the Gen4 technology. The stock is not as cheap now as then (what is?), but with almost 20% fewer shares outstanding and a much better growth story the stock is still a good buy.
PRODUCTS (approx revs):
1. Folding banquet tables - 33m
2. Folding & stacking chairs - 9m
3. Broda healthcare seating - 7m
4. Panels, lecterns, etc. - 2m
These are high end, specialty products. MITY sells direct to churches, schools, hotels, convention centers, etc. where light weight, durability and life-cycle cost trump initial purchase price. Nursing homes use Broda's specialized chairs for patients who have trouble with standard furniture. MITY has numerous patents and specialized fabrication expertise. These niche markets are not under attack from China, though it's something MITY continues to watch. The web site (http://www.mitylite.com) has some nice pictures and an amusing animation of an employee using a MITY table as a trampoline.
Chairs have sustained double digit growth for some years, as has Broda. Table growth has been low-to-mid single digits due to competitive pressures. I should note that such performance is stellar for this sector, broadline institutional furniture companies such as SCS and MLHR saw sales drop almost 40% from Y2K peaks. Gen4 is a superior product and will kick table growth into a higher gear. The Gen3 table is based on a thermoformed ABS plastic shell bonded to a wood core frame, whereas Gen4 uses a unique new (and award-winning) rotomolding process.
How will Gen4 improve results? Besides being lighter, more durable and better looking it also has superior outdoor performance (UV fade) which will open up new market niches. There is some pent-up demand - MITY has been careful not to market the new tables publicly but they've shipped limited quantities to selected customers for a year. MITY will also use Gen4 to drive their nascent international sales efforts, a move made even more timely by the dollar's collapse. Although it costs no more to manufacture, MITY plans to price Gen4 10-15% higher than Gen3. This will provide a one-time sales bump even at constant volume, and will improve gross margins. In fact, the Gen4 production/debugging line produced negative 625k of gross profit in Q3 so gross margins would actually improve 500bp if they just shut the line down!
VALUATION: MITY is not dirt cheap at 15x TTM earnings of 0.98/share. FY04 (ended 3/31/04) EPS were 1.09, sales are up but margins down due to Gen4 costs. The only analyst following MITY predicts 1.40 for the fiscal year ending 3/31/06, giving us a forward multiple of 10.5x. I don't value MITY on a TEV/EBITDA basis; with zero debt market cap approximates TEV (actually a little more due to excess cash). And EBITDA seems not particularly relevant since capex has vastly exceeded depreciation lately with the Gen4 buildout (should equalize by next FY).
Even with VIC's end-of-year deadline nigh I would consider this a marginal idea unworthy of submission if not for the management team. They are competent enough, but what really sets them apart is an almost painful level of honesty and humility. Do not buy this stock if you want slick promotors! These guys can't get through a conference call without flagellating themselves for the poor DO Group and Centercore acquisitions, despite the fact these mistakes happened years ago and management recouped most of the purchase price through painstaking liquidation. They are conservative and debt-phobic, and they seem to bend over backwards to expense stuff which is often capitalized or buried. They "get it", treating shareholders like owners instead of mushrooms.
I could sleep nights with 95% of my portfolio in MITY. I can also say that about Berkshire Hathaway and perhaps two or three others (though none spring immediately to mind). MITY may underperform, but management won't rob you or ruin the company making wild bets. If the business fell apart completely I'm confident they'd return $10+ to shareholders on the way down. With the downside covered I'm a lot more willing to take a flyer on the upside.
RISKS
1. The Gen4 launch has been delayed a year due to manufacturing difficulties. Rotomolding is new to MITY and its use for such large, flat objects is somewhat revolutionary. Six months ago the reject rate on their initial production line was 60-70%! They'd cut that in half by October and in the Q3 conference call predicted an "go for launch" reject rate of less than 10% by December. Management statements concerning Gen4 progress in the past have proven overly optimistic, but this is the first time they've been so specific about actual metrics so I am encouraged. Again, I don't think the current valuation prices in Gen4 at all, limiting your downside.
2. China is a concern for any US manufacturer. MITY's niche is not that appealing, and the technology is not easy to mimic (especially Gen4). MITY saw a Chinese knockoff of their Swiftset chair in 2003 and took legal action. The offender settled and turned over their tooling. MITY continues to evaluate moving their own production to China, although they clearly prefer it in Utah.
Catalyst
Gen4 Table launch within 1-2 months and ramp to full production by mid-2005.