CAV still puzzles me ... they should be making more than they are.
New residential builds are up 50% over the last 2 years .....currently 6000 odd extra homes a year than 2 years ago. Carpet sales up?
Commercial work, ESP the sectors that are likely to have carpets. Heaps busier than 2 years ago. Carpet sales up?
Carpet retailers in nz look they doing pretty well at the mo compared to 2 years ago. CAV selling more carpets?
Ok, Aussie a bit weak but commercial not that bad and new home building hasn't collapsed.
To me they should be selling more carpet than a few years ago but they ain't.
In the annual results they talk about growing volumes ...maybe margins are pretty shot still.
Residential construction going from 19000 homes a year now to 25000 a year home in 2 to 3 years time. Will CAV sell mor carpet? Or are the competitors going to keep on beating them?
I fear that competitors are winning.
Market heaps better than 2 years ago .... CAV not doing better. Market to be heaps better in 2 years time ......CAV do better.. You would hope so but there seems to be something holding them back.
I see CAV priced at the mo to both grow and to improve margins ....chances of that happening?
Prob wrong again but something not right at the mo.
All good questions. IMHO its a problem with retail landscape plus the wool price issue where they became priced out of the market.
Went to the Home Show yesterday (OMG are Aucklanders insanely crazy about their homes) and it was telling. The retailer that they are aligned with (Flooring Xtra) did not even have any wool carpert on display - and had a very humble presence overall.
Meanwhile Carpert Court with the massive rhino had a huge presence with a total focus on "smart strand"
Cavalier were in there somewhere but go lost behind Godfrey Hirst and Feltex.
On another note I wonder if Feltex are winning the lions share of Chc business due to being the local player (Cav = Auckland centric)
All good questions. IMHO its a problem with retail landscape plus the wool price issue where they became priced out of the market.
Went to the Home Show yesterday (OMG are Aucklanders insanely crazy about their homes) and it was telling. The retailer that they are aligned with (Flooring Xtra) did not even have any wool carpert on display - and had a very humble presence overall.
Meanwhile Carpert Court with the massive rhino had a huge presence with a total focus on "smart strand"
Cavalier were in there somewhere but go lost behind Godfrey Hirst and Feltex.
On another note I wonder if Feltex are winning the lions share of Chc business due to being the local player (Cav = Auckland centric)
Michael - interesting observations
Cavalier in there somewhere but got lost behind Hirst and Feltex - to me that is losing share to a hungry competitor who is adapting better to changing times. Does the old iconic company always struggle in this respect?
And looks like the synthetic carpet is being pushed hard by retailers - not good for Cavalier
Re Chch - to date most of the extra work has been fixing things up (insurance work) which prob doesn't involve carpet to the extent as plastering and painting trades. New houses and commercial work starting to gain momentum though. Feltex prob do well because they are more hungry anyway?
One thing about Auckland is that as homes get more insanely overpriced homeowners might find buying real carpet easier ... What's a few more thou when thevhouse is worth hundreds of thou more. Wool carpets are discretionary buy ...and wealth effect helps
One of the triggers for buying carpets (and other redcocarating projects) is buying s house (an existing one)
Today's release from reinz still has the number of house sales growing strongly. Over the last 2 years house sales are up 40% and at just under 80000 in the last 12 months above the annual average number.
I had a bit of spare time today so went back to look into the question of what proportions of CAV's carpet sales are wool and synthetic respectively.
Note 27 to the accounts, Segment Reporting, reads, inter alia, as follows:
"In determining its reportable segments, the Group considered the criteria set out in paragraph 12 of NZIFRS 8 and was able to aggregate the Cavalier Bremworth, Norman Ellison and Ontera Modular operating segments into a single reportable segment.
In aggregating these three operating segments into one reportable segment, the Group identified similarities in the following: "
Then followed a lengthy justification for not reporting the three separately. I guess it amounts to the company regarding this as commercially sensitive - but it makes it difficult to judge how well, or badly, the company is faring against predominantly synthetic manufacturers.
I’ve recently finished accumulating a number of Cavalier (CAV) shares. I thought I would post on Sharetrader my thoughts as to why Cavalier Corporation represents deep value and likely to gain more over the next two years.
In a strongly performing sharemarket like the NZX, most NZX listed companies look like they are at full or fair value, without the adequate margin of safety that a value investor would demand.
Cavalier is presently one of the few stocks out there today that offered me sufficient margin of safety in an NZ equity investment.
Here are the reasons why I liked CAV enough to buy in:
1. It’s a cyclical “smokestack” stock, which was punished throughout the GFC, but has pulled itself together and is well primed to take advantage of the improving economy in NZ, and the hopefully improving economy in Australia (still yet to see signs of growth but not getting worse). CAV is “well positioned” to improve as construction and discretionary spending improves.
2. CAV has addressed concerns with its balance sheet by paying back debt. While debt remains high-ish, it has come down from 42 to 36%, which is probably ok for the foreseeable future (I’d prefer under 30%). Inventory has also improved, down from $63m to $57m.
3. CAV has addressed concerns with a deficiency in its business, which was the lack of a synthetic/nylon carpet. Wool used to be the favoured textile, now nylon is more popular. It has recently released to some market interest the “Habitat” range of synthetic carpets, at price points that suit medium to medium-high price buyers. This carpet is made by Cavalier but yarn supplied through a partnership with Invista.
4. CAV earnings are forecast to improve dramatically in 2014 as it pulls out of a difficult trading environment and some significant redundancies and scale-backs. It has mothballed excess production capacity and its workforce is 21% less than in 2011. Operating leverage has dramatically improved as a result. Earnings growth is forecast by brokers to improve from 9.7c actual in 2013 to around 22.5c in 2017 (assuming terminal growth rate of 3% in 2017). This suggests growth of around 18.5% per annum for the next five years, with big growth expected next year, and more normalised earnings growth thereafter.
5. CAV is trading on a dividend of around 3% based on a shareprice of $1.80, but I forecast this to improve to around 5% for next year on the basis of improved profits and cashflow. Its current 2013 dividend is 4cps (100% imputed), and it is forecast to double to 8cps according to broker reports I have seen.
The two favourite metrics I like applying to assess the rationality of a share price is the Ben Graham Intrinsic Value score, and the Peter Lynch YPEG score.
Using the Ben Graham Intrinsic Value formula, I get the following based on current EPS of 9.7c in 2013:
Using the Peter Lynch score of P/E divided by long term growth of 16% plus dividend yield of 3.1%, I get 18.5/(16+3.1), or a final score of 0.97 . Lynch seems to think anything under 1 is good value, anything under 1.2 deserves a sniff. Naturally, if you use the higher growth rate of 18%, then the score looks better, being around 0.87.
So applying my usual 40% margin of safety to an intrinsic price of 3.03, I get a margin of safety buy price of $2.16, which is roughly 34-36c more than the price I’ve been acquiring at. Using the Ben Graham IV calculations, I see around 67% upside on current known earnings and 16% growth.
Negatives:
a) Cavalier is only worth $120m market cap. It is not very liquid, and it took me several days to get the holding size I wanted. Obviously, if I needed to get out quickly, I’ve got a problem. But if someone else wants to get a sizeable holding into CAV in a hurry, then they will drive up the price ferociously.
b) Debt – if the cost of interest rises significantly, then CAV will find the higher debt to be an imposition on future earnings. Reducing the debt may be a bigger priority than reducing the dividend. 1c foregone in dividends equals almost $1m in debt repaid.
c) Carpets are substitutable and subject to competition. People can have wooden floors, tiles, rugs, and polished concrete instead of carpets. And even if they choose carpet, they can then choose a number of brands, and not just Cavalier.
d) Carpets are somewhat elastic in demand compared to other products in the building sector. People can choose to defer carpet replacement, but they can’t defer a leaking roof or perishing weatherboards in the same way.
For all that, I think there is at least almost 70% upside in CAV. Again – this is a value play based on anticipated improvements in the economic cycle, not a secular growth story on a company immune to economic fortunes. If Australia's construction picks up in the next 12-18 months, then CAV will sing.
Disclaimers: I am not an authorized financial advisor. I’ve posted what I have done, not want I want you to do. If you act on the comments of an anonymous poster on the internet called “Sparky the Clown” then you will have some explaining to do to loved ones if the investment goes sour. Do your own research. I am unavailable to enter into discussion on this post, but hope that it spurs on others to consider this company’s merits, or otherwise.
Sparky. Nice to have you back on the forum. I read your latest buy with interest and will do some research myself.
I would like to challenge you on using current EPS as an input to your growth rates as this is a cyclical stock. Wouldn't you want to use an average of the past few years?
Thanks for your thoughts on CAV, Sparky and more power to your fingers and brain! As a fellow shareholder ( but of much longer standing) I hope your positive views have corresponding results shareprice-wise!
Sparky. Nice to have you back on the forum. I read your latest buy with interest and will do some research myself.
I would like to challenge you on using current EPS as an input to your growth rates as this is a cyclical stock. Wouldn't you want to use an average of the past few years?
Noodles take your pick on what eps to use over the cycle - from the heaps I know about Cavalier file
2013 was 9.7 cents as sparks said. Over the cycle maybe 18-20 is the average.
But wha sparks is doing is valuing it today and seeing what returns he could get with 'growth' back to normal sort of levels.
If you used the average eps over the cycle (say 20 cents even) wouldn't you have to assume that the 'growth' rate to use in sparks formula would be zero?
If you used the average eps over the cycle (say 20 cents even) wouldn't you have to assume that the 'growth' rate to use in sparks formula would be zero?
Exactly. Close to zero growth over a cycle. I think it is wrong to use the bottom of the cycle for the input.
Exactly. Close to zero growth over a cycle. I think it is wrong to use the bottom of the cycle for the input.
Bit more from the CAV archives
Revenues over the years ... except for the boom times in the mid 00's (recall 33,000 new houses were built compared to average 24,000) CAV revneues struggled to get much over $200m. Seems that normal times they do just OK and every now and again when the market helps them out they have the odd real good year. And maybe one of thise is on the horizon.
Even today revenues about the same as they were last century
So it all comes down to margin improvement ... and sparks sort of eluded to that
Originally Posted by winner69
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