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Archive for the ‘Aldebran Capital’ Category

Chromcraft Revington (AMEX:CRC) has filed its 10K for the period ended December 31, 2008.

We initiated the position in CRC in December last year (see the post archive here) because it was trading at a substantial discount to its liquidation value and a substantial stockholder had called for its sale or orderly liquidation. Aldebaran Capital, LLC, a 7.7% stockholder, sent a letter to the company on October 29 last year arguing that if CRC is unable to “promptly stabilize its business and rationalize its cost structure” it should be sold or liquidated. Neither of those two events has occurred and the company now appears to be trading at a premium to its value in liquidation. We initially estimated the company’s liquidation value at around $15M. We’ve now reduced our valuation to $2.8M or $0.35 per share. The problem we identified when we opened the position persists: The company is in a liquidity crisis and risks entering bankruptcy. For these reasons, we’re exiting.

We opened the CRC position at $0.46 and it closed yesterday at $0.48, which means we’re up 4.8% on an absolute basis. The S&P500 Index was at 909.7 when we opened the position and closed yesterday at 832.39, which means we’re up 12.8% on a relative basis.

The value proposition updated

The company appears to have some value on its balance sheet, but much of that value is illusory for the reasons we’ll outline below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

crc-summary-2008-12-31The $7.2M in liquidation value above doesn’t take into account CRC’s non-cancelable operating leases for office space, showroom facilities and transportation and other equipment. The future minimum lease payments under these leases for the years ending December 31, 2009, 2010, 2011, 2012 and 2013 are $1.9M, $1.1M, $0.8M, $0.6M, and $0, respectively, or $4.4M in total. Deducting the $4.4M from the $7.2M in balance sheet value leaves just $2.8M or $0.35 per share.

A slightly disappointing outcome, but we’re happy to take a small gain given the reduction in value.

[Full Disclosure:  We do not have a holding in CRC. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Chromcraft Revington (AMEX:CRC) is a tiny, AMEX-listed net-net stock with a substantial stockholder calling for its sale or orderly liquidation. CRC has a market capitalization of only $2.8M, but the company’s written-down net current asset value is much higher at around $15M. The only problem? The company is in a liquidity crisis and risks entering bankruptcy if its fortunes don’t turn around. Aldebaran Capital, LLC, a 7.7% stockholder, sent a letter to the company on October 29 arguing that if CRC is unable to “promptly stabilize its business and rationalize its cost structure” it should be sold or liquidated.

About CRC

CRC is engaged in the design, production, sales and import of residential and commercial furniture. It markets its residential furniture products under the CR-Home banner with the brand names Chromcraft, Peters-Revington, Cochrane, Sumter and Silver. CRC distributes its products throughout the United States and Canada, primarily through furniture dealers. The history of the company is available on its website.

The value proposition

CRC is one of the most deeply undervalued asset situations we’ve uncovered, which is no surprise given the parlous state of its earnings and operating cash flow. The company made a loss of $14.87M last year and a loss of $3.39M in the 2006 financial year. Cash from Operating Activities has also been disappointing, negative to the tune of $3M in 2007 and $4M this quarter. All is not doom and gloom however: some residual value can still be found on the balance sheet.

Set out below is our summary analysis (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

crc-summary

A quick glance at the balance sheet shows that CRC is in a liquidity crisis. The company had $8.4M in cash 12 months ago, but has burned through it since then. In three quarters the receivables have reduced from $18.4M in March to $16.3M in this quarter, with none of it flowing through to cash. The company states in its 10Q that it has “several sources of cash” that it believes will be “adequate to meet its short term liquidity requirements.” These are as follows:

  • At September 27, 2008, [CRC] has unused borrowing capacity of approximately $14,231,000 under its Bank Facility.
  • [CRC] expects to receive asset sale proceeds of approximately $3,300,000 in 2009 from the sale of its Lincolnton, North Carolina buildings, machinery and equipment.
  • At September 27, 2008, [CRC] has refundable income taxes of $3,462,000, primarily from net operating loss (NOL) carrybacks, which are expected to be received in the fourth quarter of 2008.
  • [CRC] plans to sell excess inventories and generate cash of approximately $3,000,000 in 2009.
  • [CRC] has recently implemented spending controls and overhead expense reductions in personnel.
  • Future capital spending for information technology upgrades will be delayed to 2010.

CRC’s bankruptcy is not necessarily a problem for an investor if the assets are sufficient to pay out the liabilities and leave some residual value in excess of the current stock price. We think that there is a good chance that this is the case, provided that some action is taken soon to preserve the remaining value.

Assuming the board acts quickly to salvage what remains of CRC, we estimate the company’s per share value in liquidation at around $2.45 or $15M in toto. To reach this estimate, we’ve written down the receivables by a quarter to a little over $12M or $2.00 per share, inventory by two-thirds to $12M or $1.96 per share and Property, Plant and Equipment by 85% from $46M to $6.9M or $1.13 per share. Deducting Total Liabilities of $16.4M or $2.68 per share leaves a value in liquidation of around $2.45 per share.

The catalyst

Aldebran Capital acquired its 7.7% holding in CRC in September and October of this year, paying between $0.42 and $2.72 per share. In a letter to CRC’s chairman, Aldebran Capital has asked the board to take steps to preserve the remaining value. Aldebran Capital’s letter annexed to its 13D filing of October 29, 2008 is reproduced below:

Dear Mr. Chairman:

Aldebaran Capital, LLC is an Indiana limited liability company and registered investment advisor. As noted in our recent filing, we have acquired 7.7% of the outstanding shares of Chromcraft Revington, Inc.

We have followed the transformation of the company over the past few years, as Chromcraft has undergone a major change in its business model.

As security analysts, we recognize the challenges the company has faced in implementing its plan. In addition, we fully understand that current economic conditions are causing the task to be even more difficult.

However, the company is nearly three years into restructuring maneuvers that were begun in 2006. Along the way, Chromcraft has incurred significant losses and continues to accrue costs attendant with these changes. As shareholders, we believe that it is time for the company to demonstrate that these actions are bearing fruit.

In our opinion, if the company is unable to promptly stabilize its business and rationalize its cost structure, we believe that the Board should consider either: a) the sale of the company or, b) undertake an orderly liquidation of the company assets.

We look forward to speaking with you further about Chromcraft.

Sincerely,

Kenneth R. Skarbeck
Managing Member,
Aldebaran Capital, LLC

Conclusion

It’s always difficult to recommend a stock in a liquidity crisis, but crises are what create the wide disparities between value and price, or, in other words, the bargains. CRC is such a bargain. At its close yesterday of $0.46, CRC is trading at a tiny 20% of our estimate of its liquidation value of around $2.45 per share. While there is substantial value on the balance sheet relative to the stock price, the risk is that the company continues to trade and destroys that remaining value. This is always the risk with net net stocks. The good news is that Aldebaran Capital has already called for CRC’s board to take some stockholder friendly steps. We think that Aldebran Capital will be successful and CRC’s value will sooner or later be reflected in its stock.

Warning: When trading in tiny, thinly traded stocks with a wide bid-ask spread, make sure you set a limit on the stock order or you might end up paying more than you want.

CRC closed yesterday at $0.46.

The S&P 500 Index closed at 909.70.

[Disclosure: We do not have a holding in CRC. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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