Rating Update: Stock Rating C-Low Neutral (10/8/19)-Culp Inc. (CULP).

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BUSINESS

Culp, Inc. manufactures, sources, markets, and sells mattress fabrics, sewn covers, and cut and sewn kits for use in mattresses, foundations, and other bedding products in North America, the Far East, Asia, and internationally. It operates in two segments, Mattress Fabrics and Upholstery Fabrics. The Mattress Fabrics segment offers woven jacquard, knitted, and converted fabrics for use in the production of bedding products, including mattresses, box springs, foundations, and top of bed components.
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INVESTMENT RATING

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With future capital returns forecasted to exceed the cost of capital, CULP is expected to continue to be a Value Builder.

Culp has a current Value Trend Rating of C (Low Neutral).
This rating combines very contradictory signals from two proprietary PTR measures of a stock’s attractiveness. Culp has a good Appreciation Score of 80 but a very low Power Rating of 8, producing the Low Neutral Value Trend Rating.

Culp’s stock is selling well below targeted value. The current stock price of $15.01 compares to targeted value 12 months forward of $28.
Culp’s high appreciation potential results in an appreciation score of 80 (only 20% of the universe has greater appreciation potential.)
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Culp has a Power Rating of 8. (Culp’s very low Power Rating indicates that it only has a better chance of achieving favorable investment performance over the near to intermediate term than 8% of companies in the universe.)
Factors contributing to this very low Power Rating include: Culp’s earnings estimates have fallen very significantly in recent months; is in an extremely unfavorable position current; and recent price action has been unfavorable.

INVESTMENT PROFILE

Culp’s financial strength is average. Financial strength rating is 50.
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Relative to the S&P 500 Composite, Culp Inc. has significant Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that CULP is lower risk. Relative weaknesses include: low forecasted profitability, low financial strength, and low expected growth. Culp’s valuation is moderate: moderate dividend yield, moderate P/E ratio, and low price/book ratio. CULP has unusually low market capitalization.

CURRENT SIGNALS

Culp’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

Culp’s current technical position is mixed. The stock price is in a 0.5 month up move. The stock has appreciated 25.1% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

The stock is currently rated C.
Culp Inc. (NYSE: CULP) stock closed at $0.01 on 10/8/19 after a major increase of 45.5%. However, unusually low trading volume at 55% of normal accompanied the advance. The stock has declined -7.9% during the last week and has been weak relative to the market over the last nine months.

CASH FLOW

In 2019, Culp experienced a slight decrease in cash of -$4.43 million (-9%). Sources of cash were slightly lower than uses. Cash generated from 2019 EBITDA totalled +$23.62 million. Non-operating uses consumed -$2.99 million (-13% of EBITDA). Cash taxes consumed -$5.40 million (-23% of EBITDA). Re-investment in the business amounted to -$11.18 million (-47% of EBITDA). On a net basis, debt investors contributed +$0.63 million (+3% of EBITDA) while equity investors pulled out -$9.12 million (-39% of EBITDA).
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Culp’s Non-operating Income, %EBITDA has experienced a small downtrend over the period. This downtrend was accompanied by stability for the Culp Inc. Peer Group. In most years, Culp was in the second quartile and third quartile. Currently, Culp is lower quartile at -13% of EBITDA (-$2.99 million).

Culp’s Cash Taxes, %EBITDA experienced a strong overall downtrend over the period. This downtrend was accompanied by stability for the Culp Inc. Peer Group. In most years, Culp was in the top quartile and third quartile. Currently, Culp is lower quartile at -23% of EBITDA (-$5.40 million).

Culp’s Business Re-investment, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Culp Inc. Peer Group. In most years, Culp was in the third quartile and second quartile. Currently, Culp is substantially above median at -47% of EBITDA (-$11.18 million).

Culp’s Debt Investors, %EBITDA has experienced a strong overall uptrend over the period. This improvement was accompanied by stability for the Culp Inc. Peer Group. In most years, Culp was in the third quartile and second quartile. Currently, Culp is at median at +3% of EBITDA (+$0.63 million).

Culp’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Culp Inc. Peer Group. (Since 2017 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Culp was in the third quartile and second quartile. Currently, Culp is substantially below median at -39% of EBITDA (-$9.12 million).

Culp’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Culp Inc. Peer Group. In most years, Culp was in the top quartile and third quartile. Currently, Culp is substantially below median at -19% of EBITDA (-$4.43 million).
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Culp’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Culp Inc. Peer Group as well. (Since 2017 Cash, %Revenue has experienced sharp improvement.) In most years, Culp was in the top quartile. Currently, Culp is upper quartile at +15%.

PROFITABILITY

Culp’s return on equity has eroded very significantly since 2010 accelerating very sharply after the 2012 level.
A major analytical focus for CULP is a very strong negative trend in pretax operating return a significantly augmented by very strong negative trend in non-operating factors.
The productivity of Culp’s assets declined over the full period 2010-2019: asset turnover has suffered a strong overall downtrend.
Reinforcing this trend, pretax margin experienced a volatile overall downtrend that accelerated very sharply from the 2016 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Culp’s return on equity is lower quartile (3.8%) for the four quarters ended July, 2019.
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Operating performance (pretax return on assets) is slightly below median (5.7%) reflecting asset turnover that is at the upper quartile (1.34X) and below median pretax margin (4.3%).
Tax “keep” rate (income tax management) is lower quartile (47.1%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is at the lower quartile (1.40X).

GROWTH RATES

Overall, Culp’s growth rate has slowed considerably in recent years.
Culp’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 4.4% per year. (More recently it has been -1.2%.)

Total asset growth has been 7.6% per year.

Annual E.P.S. growth has been -3.4% per year.

Equity growth has been 10.3% per year. (More recently it has been 6.6%.)
No consensus growth rate forecast is available for Culp.
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Relative to the Culp Inc. Peer Group, Culp’s historical growth measures are erratic. Equity growth (10.3%) has been at the upper quartile. Total asset growth (7.6%) has been at median. Revenue growth (4.4%) has been at the lower quartile. E.P.S. growth (-3.4%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Culp’s stock price performance has been exceptional. Between December, 2008 and October, 2019, Culp’s stock price rose +658%; relative to the market, this was a +137% gain. Significant price moves during the period: 1) December, 2016 – October, 2019: -60%; 2) November, 2011 – September, 2015: +288%; and 3) January, 2009 – May, 2010: +597%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -31.6% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through September, 2019 of -31.6% is lower quartile relative to Culp Inc. Peer Group.

Current 5-year total return performance of -0.5% is lower quartile relative to the S&P 500 Composite.
Through September, 2019, with lower quartile current 5-year total return of -0.5% relative to S&P 500 Composite, Culp’s total return performance is below median relative to Culp Inc. Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, CULP’s overall valuation is quite low. Four of five factors are upper quartile. The highest factor is the price/earnings ratio, followed by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/assets, then by the price/equity ratio. The lowest factor, ratio of enterprise value/revenue, is lower quartile.

Relative to Culp Inc. Peer Group, CULP’s overall valuation is low. The highest factor, the price/earnings ratio, is at the upper quartile. Price/equity ratio is at the lower quartile. Ratio of enterprise value/earnings before interest and taxes is below median. Ratio of enterprise value/assets is lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
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Culp has a very large value gap compared to the median. For CULP to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.50X to 0.69X. If CULP’s ratio of enterprise value/revenue were to rise to 0.69X, its stock price would be higher by $5 to $20.
For CULP to achieve upper quartile valuation relative to the Culp Inc. Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.50X to 0.93X. If CULP’s ratio of enterprise value/revenue were to rise to 0.93X, its stock price would increase by $10 from the current level of $15.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, CULP is expected to continue to be a Value Builder.
Culp’s current Price Target of $32 represents a +113% change from the current price of $15.01.
This high appreciation potential results in an appreciation score of 80 (only 20% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 80, the low Power Rating of 8 results in an Value Trend Rating of C.
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Culp’s current Price Target is $32 (-23% from the 2019 Target of $41 but +113% from the 10/08/19 price of $15.01). This fall in the Target is the result of a -1% decrease in the equity base and a -22% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a large negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a very large positive impact.
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PTR’s return on equity forecast is 9.4% — below our recent forecasts. Forecasted return on equity erratic but little changed between 2011 and 2019. The current forecast is well below the 2013 peak of 17%.

PTR’s growth forecast is 4.0% — slightly below our recent forecasts. Forecasted growth exhibited a modest, erratic decline between 2011 and 2019. The current forecast is well below the 2013 peak of 12%.

PTR’s cost of equity forecast is 5.2% — slightly below recent levels. Forecasted cost of equity erratic but little changed between 2011 and 2019. The current forecast is steady at the 2011 low of 7.1%.
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At Culp’s current price of $15.01, investors are placing a negative value of $-12 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 7.0% per year, and a return on equity of 13.9% versus a cost of equity of 7.2%.
PTR’s 2021 Price Target of $32 is based on these forecasts and reflects an estimated value of existing assets of $23 and a value of future investments of $9.

About John Lafferty 49646 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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