| 2024 | 2025 | ||||||
| Price: | 9.47 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 16 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 155 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 10 | EBIT | 0 | 0 | |||
| TEV (in $M): | 165 | TEV/EBIT | 0 | 0 | |||
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An aside
Back in the late 90s/early 00's there was something called stock volatility. A name you'd own would be down 3-5% and your portfolio manager would have you place calls to find out what was going on. And, usually, there would be some news that hadn't been disseminated in that pre Reg FD era (or only loosely so immediately following its implementation). That contrasts starkly with what we/all of us small and micro cap investors have witnessed of late. Names are routinely up or down 10% on absolutely no news.....whether it's algorithmic trading run amok, purposeful trading near moving averages, front running index deletions or additions.......it's of little surprise that those doing much of the buying and selling have little interest in fundamental value investing. The latest example of the above is Friday's market action in Virco; a name that we've owned for decades, believe we know quite well, and shouldn't carry many surprises. The stock finished down 18% on no news and a flood of volume.
Valuation
s/o: 16.3mm
mc: 155
net debt: 10mm when smoothed to account for extreme seasonality and working capital cycles
'24 ebitda est: 36mm
'25 ebitda est: 46mm
ev/ebitda '24: 4.6x
ev/ebitda '25: 3.6x
Company Description (from most recent 10k)
Thesis
We are a firm that believes in the power of long term compounding and have owned many of our positions for decades--trading around the names as we hopefully move up the learning curve over time. Virco is a name we first owned in the very early 1990s and have spent enough time with the Virtue family--first the father and then the son--to attest to their character and stewardship. We recently visited with them in Conway, AR and the plant tour was fascinating. Not only is the physical footprint fairly awesome (1mm sq ft is enormous in person) but, perhaps more than any company we know of, there was a very clear sense of culture. The average tenure of the employee base is many years, everyone was smiling, greeting each other, speaking about how they view the company as one large family. Doug, the CEO, was practically glowing as he walked through the plant stopping to say hi to everyone-shaking hands and hugging. It is very clear that this is a company that treats its employees well and engenders strong feelings of loyalty.
Domestic furniture makers have had a very tough two decades. The Chinese labor arbitrage ultimately doomed these companies and most manufacturing capacity ultimately relocated to Asia. The domestic participants simply couldn't compete on price and lost enormous market share. By and large that was the state of things up until 2020. Covid stressed supply chains to an untenable degree---schools, even though many operated remotely, were left short furniture and, like a lightswitch, suddenly realized they (the national buying group) wanted to deal locally. Virco had stuck to its guns for decades and never operated in Asia. As such, they have enjoyed a position of incumbency and have won new business at record rates. We believe that the business has reached a new level of profitability which should be borne out in quarters to come (recognizing the extreme seasonality in the business) and that the current price is meaningfully below intrinsic value as witnessed by the valuation metrics above.
While undemanding multiples are nothing new for small caps, Virco is a market leader with a long history of reliable service and quality products. For it to be trading at 3.6x forward EBITDA suggests that market participants view this past year as an anomaly and that results will revert fairly quickly. We are of the belief that pendulums swing in wide arcs and given the length of the down cycle we should expect sustained levels of meaningful profitability to continue for some time as Virco benefits from its superior manufacturing footprint and improved pricing that is contractually locked in.
Given this newfound profitability we believe management will seek to return capital to shareholders through buybacks and have announced a 5mm authorization plan to begin. Also, in December the company declared its first since 2018-we believe that, while a nominal amount, it signals confidence in the health of the business.
Financials
| Three months ended | |||||||||||
| 10/31/2023 | 10/31/2022 | ||||||||||
| (In thousands, except per share data) | |||||||||||
| Net sales | $ | 84,252 | $ | 77,395 | |||||||
| Costs of goods sold | 46,041 | 46,618 | |||||||||
| Gross profit | 38,211 | 30,777 | |||||||||
| Selling, general and administrative expenses | 23,505 | 21,977 | |||||||||
| Operating income | 14,706 | 8,800 | |||||||||
| Unrealized loss (gain) on investment in trust account | 176 | (220) | |||||||||
| Pension expense | 301 | 259 | |||||||||
| Interest expense | 765 | 567 | |||||||||
| Income before income taxes | 13,464 | 8,194 | |||||||||
| Income tax expense | 3,304 | 319 | |||||||||
| Net income | $ | 10,160 | $ | 7,875 | |||||||
| Net income per common share: | |||||||||||
| Basic | $ | 0.62 | $ | 0.49 | |||||||
| Diluted | $ | 0.62 | $ | 0.48 | |||||||
| Weighted average shares of common stock outstanding: | |||||||||||
| Basic | 16,347 | 16,211 | |||||||||
| Diluted | 16,428 | 16,249 | |||||||||
| Nine months ended | |||||||||||
| 10/31/2023 | 10/31/2022 | ||||||||||
| (In thousands, except per share data) | |||||||||||
| Net sales | $ | 226,516 | $ | 192,276 | |||||||
| Costs of goods sold | 126,525 | 119,947 | |||||||||
| Gross profit | 99,991 | 72,329 | |||||||||
| Selling, general and administrative expenses | 65,343 | 57,099 | |||||||||
| Operating income | 34,648 | 15,230 | |||||||||
| Unrealized (gain) loss on investment in trust account | (448) | 85 | |||||||||
| Pension expense | 623 | 650 | |||||||||
| Interest expense | 2,560 | 1,692 | |||||||||
| Income before income taxes | 31,913 | 12,803 | |||||||||
| Income tax expense | 7,661 | 332 | |||||||||
| Net income | $ | 24,252 | $ | 12,471 | |||||||
| Net income per common share: | |||||||||||
| Basic | $ | 1.49 | $ | 0.77 | |||||||
| Diluted | $ | 1.48 | $ | 0.77 | |||||||
| Weighted average shares of common stock outstanding: | |||||||||||
| Basic | 16,277 | 16,118 | |||||||||
| Diluted | 16,334 | 16,136 |
|||||||||
Insider Ownership
Virtue family: 4,761,375 29%
Non-Virtue insiders: 410,075 2.5%
Miscellaneous
| Six months ended | |||||||||||
| 7/31/2023 | 7/31/2022 | ||||||||||
| (In thousands) | |||||||||||
| Operating activities | |||||||||||
| Net income | $ | 14,092 | $ | 4,596 | |||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 2,455 | 2,259 | |||||||||
| Non-cash lease benefits | (340) | (265) | |||||||||
| Provision for doubtful accounts | 30 | 35 | |||||||||
| Amortization of debt issuance costs | 55 | 69 | |||||||||
| Deferred income taxes | 700 | (89) | |||||||||
| Stock-based compensation | 252 | 406 | |||||||||
| Amortization of net actuarial loss for pension plans | — | 270 | |||||||||
| Non-cash unrealized (gain) loss on investment | (624) | 305 | |||||||||
| Surrender of life insurance policies | (95) | — | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade accounts receivable | (50,187) | (26,552) | |||||||||
| Other receivables | 10 | 23 | |||||||||
| Inventories | (4,447) | (13,855) | |||||||||
| Income taxes | 3,346 | 43 | |||||||||
| Prepaid expenses and other current assets | (134) | (91) | |||||||||
| Accounts payable and accrued liabilities | 13,737 | 12,876 | |||||||||
| Net cash used in operating activities | (21,150) | (19,970) | |||||||||
| Investing activities: | |||||||||||
| Capital expenditures | (2,795) | (1,524) | |||||||||
| Purchases of marketable securities in trust accounts | — | (4,856) | |||||||||
| Proceeds from sale of marketable securities in trust accounts | — | 2,112 | |||||||||
| Proceeds from surrendering life insurance policies | — | 2,744 | |||||||||
| Net cash used in investing activities | (2,795) | (1,524) | |||||||||
| Financing activities: | |||||||||||
| Borrowing from long-term debt | 35,688 | 28,352 | |||||||||
| Repayment of long-term debt | (10,915) | (5,625) | |||||||||
| Payment on deferred financing costs | (175) | (200) | |||||||||
| Tax withholding payments on share-based compensation | (110) | (213) | |||||||||
| Net cash provided by financing activities | 24,488 | 22,314 | |||||||||
| Net increase in cash | 543 | 820 | |||||||||
| Cash at beginning of period | 1,057 | 1,359 | |||||||||
| Cash at end of period | $ | 1,600 | $ | 2,179 |
|||||||
| Nine months ended | |||||||||||
| 10/31/2023 | 10/31/2022 | ||||||||||
| (In thousands) | |||||||||||
| Operating activities | |||||||||||
| Net income | $ | 24,252 | $ | 12,471 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 3,763 | 3,390 | |||||||||
| Non-cash lease benefits | (517) | (404) | |||||||||
| Provision for doubtful accounts | 45 | 60 | |||||||||
| Amortization of debt issuance costs | 85 | 96 | |||||||||
| Deferred income taxes | 363 | 239 | |||||||||
| Stock-based compensation | 423 | 509 | |||||||||
| Defined pension plan settlement | 372 | 64 | |||||||||
| Amortization of net actuarial loss for pension plans | 3 | 405 | |||||||||
| Non-cash unrealized (gain) loss on investment | (448) | 85 | |||||||||
| Surrender of life insurance policies | (95) | — | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade accounts receivable | (14,639) | (10,319) | |||||||||
| Other receivables | 41 | 16 | |||||||||
| Inventories | 8,475 | (10,092) | |||||||||
| Income taxes | 3,167 | 51 | |||||||||
| Prepaid expenses and other current assets | 133 | 306 | |||||||||
| Accounts payable and accrued liabilities | (3,150) | 4,578 | |||||||||
| Net cash provided by operating activities | 22,273 | 1,455 | |||||||||
| Investing activities: | |||||||||||
| Capital expenditures | (4,605) | (2,614) | |||||||||
| Purchases of marketable securities in trust accounts | — | (7,280) | |||||||||
| Proceeds from sale of marketable securities in trust accounts | — | 4,536 | |||||||||
| Proceeds from surrendering life insurance policies | — | 2,744 | |||||||||
| Net cash used in investing activities | (4,605) | (2,614) | |||||||||
| Financing activities: | |||||||||||
| Borrowing from long-term debt | 36,906 | 32,947 | |||||||||
| Repayment of long-term debt | (50,459) | (30,559) | |||||||||
| Payment of deferred financing costs | (175) | (200) | |||||||||
| Tax withholding payments on share-based compensation | (110) | (213) | |||||||||
| Net cash (used in) provided by financing activities | (13,838) | 1,975 | |||||||||
| Net increase in cash | 3,830 | 816 | |||||||||
| Cash at beginning of period | 1,057 | 1,359 | |||||||||
| Cash at end of period | $ | 4,887 | $ | 2,175 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Property, plant and equipment acquired and not yet paid at end of period | $ | 178 | $ | 291 | |||||||
| Cash paid during the year for interest | $ | 2,223 | $ | 1,310 | |||||||
| Cash paid during the year for income tax, net of refunds | $ | 4,156 | $ | 65 |
|||||||
Net debt at the end of the 2nd quarter was 45mm vs only about 4mm now.
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