Description

Pillowtex makes pillows, blankets, comforters, sheets under the Royal Velvet, Fieldcrest, Cannon, Charisma brand names. PWTX emerged from Ch 11 late spring 2002, having erased nearly 900 million in acquisition-related debt, closed a baker's dozen plants, and laid off 4500 fewer employees. Also has 533MM in NOLs.

The current stock quote is 3.20, down from 6 at emergence and down from 9 within a month or so of emergence. Roughly 20 mill shares out give a 64 mill market cap.

POR projections, assuming no growth in the industry and stable economic conditions, projected reaching a 3.5% net margin, 7.3% op margin on 1.07 bill sales by 2004. This trajectory would provide 28 mill net income in 2003 (1.40/sh), 37 mill net income in 2004 (1.85/sh). Normalizing working capital (thanks to normalizing vendor, retailer relationships) would provide a boost to free cash flow, which would be around 35-40 mill/year before principal payments on debt.

So based on POR projections, the stock is trading at less than 3X 2003 earnings, less than 2X 2004 earnings, and at about 1.5X free projected free cash flow. Post-reorg/fresh start book value is around 200 mill, so at 64 mill we're at .32X book and at around 6% of sales.

Clearly the market doesn't believe the projections. The market is actually pricing in a catastrophic miss, and a high risk of ch 22. I don't believe the projections either - although I do believe they are attainable on a lengthened timeline, and I certainly don't take the market's view of the equity.

Of course, the market isn't entirely rational right now. All stocks have had a rough go, but reorganized equities are getting slammed especially hard as distressed securities funds find themselves in some distress courtesy of all the 2nd, 3rd, 4th, and 5th foot dropping going on in WCOM, KM, etc. PWTX is in a Buffett-certified 'bad business' and as I've heard, no price is too low for some of the sellers in the stock. As well, Westpoint Stephens' situation is worsening, spooking watchers of the sector.

The stock was distributed to bank debt holders, including vultures. Oaktree owns 20%. Lehman and BofA ended up with multi-million share chunks too. Share volumes are double counted, so it's been in distribution essentially since it emerged. A lot of it is coming through CRT in case you want to buy in volume. Just today I cleaned out a guy at 3.20 that had received stock in the distribution. A Nasdaq listing is hoped for by the end of the year, although we can't expect wide sponsorship.

A crucial point is that the company has hired new management that is widely respected. Pre-reorg management was simply horrid and attracted short sellers in droves - many of the savviest hedgies know PWTX as a great short from a few years ago. Things are different now though. Dave Perdue comes from Reebok where he has a big background in buying everything, making nothing. His position at Reebok focused on international vendor relationships. He recently replaced the restructuring-era COO with a guy who worked with Dave at Sara Lee, where they oversaw significant growth in the underwear division. Sources in the textiles industry view these hires as very good hires. I would hope and expect the addition of more talent in the executive suite.

The strategy of the new management is emphasizing branding vs. manufacturing. They are actively seeking relationships with overseas manufacturers, and I would expect that they have some success with this, given the CEO and COO's backgrounds at places that outsourced everything. They are searching in particular for one large vendor in order to have greater control over quality.

The risks in the story are primarily in management execution of the branding over manufacturing strategy. As well, the strength of the consumer is an issue, as PWTX in present form is subject to tremendous operating leverage. PWTX, while leveraged, is not over-leveraged and has the cleanest balance sheet in the industry at present.

A good comp is Springs Industries, which was taken private by management and Heartland, advised by CRT, in late 2001. Taken private at 1.24 bill by financial buyers in a 5:1 recap. Management controlled 71% of the voting, exerting pressure on the price extracted. At that price, Springs traded at an 11.7X forward PE, 12.7X trailing PE, EV/EBITDA 5.2X, EV/EBIT 9.4X, EV/Sales .57. Springs had 3.1% net margins, 11% EBITDA margins, 2.3 bill sales. Revenues were in decline, and Wal-Mart was a big customer at 27% of sales, not unlike PWTX. The brands at Springs include Wamsutta, Springmaid, Regal, Dundee, all of which generally have slightly lower price points than PWTX's better brands. Putting any of these numbers on PWTX gets PWTX's common stock price well over $10/share - indeed, nearer $15/share. Again I'd note that the buyer of Springs was financial and the transaction was well-levered.

Other comps are relatively poor because WXS has a different mix of business, scary capital structure. DRF is lower end/different mix of biz. Springs is really the best comp, though 2X as large as PWTX. PWTX at 1 bill plus in sales is no small potato though.

Catalyst

Completion of distribution and securing of stock in stronger post-reorg, non-distressed, stock-guy hands. Appreciation potential on cessation of dumping is tremendous. Jumped 35% in one day when the sellers disappeared at the onset of the July rally. 7-8 in next 6 months are pure technical rebound is possible, with operational improvements account for remainder of appreciation to 10+.