This past weekend, my son and I saw the new Avengers movie, Avengers: Infinity War, which reportedly had the largest global opening in history two weeks ago, raking in $630 million. Strangely, we were literally the only two in the entire theater, so I'm guessing that most have already seen it. Most people also seem to love this movie. I did not. It was way too complicated, too many characters, and there was way too much going on. I must be getting a bit long in the tooth, but I'd prefer the next superhero movie I see to be two people in a room, with dialogue only. Keep it simple.
Keeping it simple also applies to investing, so I was thrilled this weekend to see that there is a new net/net available (company trading below its net current asset value). There is nothing simpler than utilizing this technique developed by Benjamin Graham in order to identify potentially cheap companies. Unfortunately, in this market environment in which the rising tide of the past 10 years has lifted many boats, you rarely see net/nets anymore. In fact, at this writing, there are just three with market caps in excess of $100 million. The newest addition CSS Industries (CSS) , joins VOXX International (VOXX) and Richardson Electronics (RELL) .
CSS, which sells craft, seasonal, and celebration products to mass market retailers, is a member of my 2018 Double Net Value Portfolio, a static portfolio which was designed to track companies trading at between 1 and 2 times net current asset value (NCAV). However, the company has had such a precipitous fall recently, down 37% since reporting third quarter results in early February, that it now trades at 0.99X NCAV.
While the company beat third quarter earnings estimates, reporting earnings per share of $1.52 versus the $1.32 "consensus" (the company is followed by just one analyst), revenue of $130.6 million missed the mark by $3.9 million. The company's third quarter is the make or break quarter; given the seasonal nature of many of its products, that's when most of the profits are typically generated.
What is likely weighing the stock down is the fact that the company has lowered full year 2018 guidance. The company expects full year revenue will be in the $356 million to $362 million range, down from the previous range of $367 million to $369 million, with "base" business down 5% to 7% from last year. Management also reduced adjusted EBITDA expectations for the year from a range of $28 to $32 million, to a range of $23 to $26 million.
The company also operates in an increasingly difficult retail environment, and has also been assimilating a couple of recent acquisitions, Simplicity Creative Group, which it completed this past November, and McCall Pattern Company, which it acquired in late 2016.
All of this adds up to a company that is being shunned by the market, and is entering its low season quarters. Sales generally pick up in the second quarter (ends in September), so there might not be much to see the next two quarters.
CSS ended its latest reported quarter with $30 million, or $3.30 per share, in cash, and $48.7 million in debt, which it used to fund the Simplicity acquisition. Besides trading below its NCAV, it also trades at just 0.69X tangible book value per share.
Stocks often are cheap for good reasons; the difficult part is trying to figure out when the markets have overly punished a name. I am still trying to determine that in the case of CSS, but it is a name I'll be watching.
