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 the United States, 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.
INVESTMENT RATING
CULP is expected to continue to be Value Creation neutral reflecting capital returns that are forecasted to be in line with the cost of capital.
Culp has a current Value Trend Rating of F (Lowest Rating).
The Value Trend Rating reflects consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Culp has a slightly negative Appreciation Score of 33 and a poor Power Rating of 26, leading to the Lowest Value Trend Rating.
Culp’s stock is selling at targeted value. The current stock price of $4.50 compares to targeted value 12 months forward of $4.
This moderately low appreciation potential results in an appreciation score of 33 (67% of the universe has greater appreciation potential.)
Culp has a Power Rating of 26. (This poor Power Rating indicates that Culp only has a better chance of achieving attractive investment performance over the near to intermediate term than 26% of companies in the universe.)
Factors contributing to this poor Power Rating include: Culp’s earnings estimates have fallen very significantly in recent months; and recent price action has been unfavorable. An offsetting factor is the Broadwoven Fabric Mill, Cotton comparison group is currently in a modestly favorable position.
INVESTMENT PROFILE
Culp’s financial strength is low. Financial strength rating is 12.
Relative to the S&P 500 Composite, Culp Inc. has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that CULP is normal risk. Relative weaknesses include: low historical profitability, low financial strength, high stock price volatility, and low historical growth. Culp’s valuation is low: low dividend yield, low 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 very weak. The stock price is in a 5.8 month down move. The stock has declined 20.0% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Significant negative changes in investment behavior have recently occurred for Culp Inc. (NYSE: CULP): its longer term price trend turned down.
Marginal negative changes in fundamentals have recently occurred for Culp Inc. (NYSE: CULP): the stock’s power rating fell below 50.
The stock is currently rated F.
On 4/10/24, Culp Inc. (NYSE: CULP) stock was unchanged 0.0%, closing at $4.50. However, exceptionally low trading volume at 44% of normal accompanied the flat performance. Relative to the market the stock has been weak over the last nine months and has declined -2.4% during the last week.
CASH FLOW
In 2023, Culp generated a very significant increase in cash of +$7.82 million (+54%). Sources of cash were much larger than uses. Cash consumed from 2023 EBITDA totaled -$19.76 million. Non-operating uses consumed -$1.41 million (+7% of EBITDA). Cash taxes consumed -$3.18 million (+16% of EBITDA). Withdrawal of investment from the business totaled +$35.10 million (-178% of EBITDA). On a net basis, debt investors withdrew -$4.03 million (+20% of EBITDA) while equity investors furnished +$1.10 million (-6% of EBITDA).
Culp’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Culp Peer Group. In most years, Culp was in the third quartile and lower quartile. Currently, Culp is at the upper quartile at +7% of EBITDA (-$1.41 million).
Culp’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Culp Peer Group. In most years, Culp was in the lower quartile and top quartile. Currently, Culp is upper quartile at +16% of EBITDA (-$3.18 million).
Culp’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Culp Peer Group. In most years, Culp was in the second quartile and lower quartile. Currently, Culp is lower quartile at -178% of EBITDA (+$35.10 million).
Culp’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Culp Peer Group. (Since 2021 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Culp was in the second quartile and top quartile. Currently, Culp is at the upper quartile at +20% of EBITDA (-$4.03 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 Peer Group. In most years, Culp was in the third quartile and second quartile. Currently, Culp is above median at -6% of EBITDA (+$1.10 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 Peer Group. In most years, Culp was in the top quartile and lower quartile. Currently, Culp is lower quartile at -40% of EBITDA (+$7.82 million).
Culp’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Culp Peer Group. In most years, Culp was in the top quartile. Currently, Culp is at the upper quartile at +10%.
PROFITABILITY
Culp’s return on equity has eroded very significantly since 2014. The current level is -16.9% versus the high of 15.6% and the low of -35.4%.
This very significant erosion was due to very strong negative trend in pretax operating return and minor negative trend in non-operating factors.
The productivity of Culp’s assets declined over the full period 2014-2024: asset turnover has experienced a downtrend.
Culp’s pretax margin experienced a very strong overall downtrend over the period 2014-2024.
Non-operating factors (income taxes and financial leverage) had a small negative influence on return on equity.
Culp’s return on equity is lower quartile (-16.9%) for the four quarters ended January, 2024.
Operating performance (pretax return on assets) is lower quartile (-7.5%) reflecting asset turnover that is upper quartile (1.67X) and lower quartile pretax margin (-4.5%).
Tax “keep” rate (income tax management) is upper quartile (128.7%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at median (1.76X).
GROWTH RATES
Overall, Culp’s growth rate has slowed very 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 -2.3% per year.
Total asset growth has been -0.9% per year. (More recently it has been -9.1%.)
Annual E.P.S. growth has been -21.0% per year.
Equity growth has been -3.2% per year. (More recently it has been -11.1%.)
Culp’s consensus growth rate forecast (average of Wall Street analysts) is 18.0% — substantially above the average of the historical growth measures.
Relative to the Culp Peer Group, Culp’s historical growth measures are consistently lower quartile. Revenue growth (-2.3%) has been lower quartile. Total asset growth (-0.9%) has been lower quartile. E.P.S. growth (-21.0%) has been lower quartile. Equity growth (-3.2%) has been lower quartile.
In total contrast, consensus growth forecast (18.0%) is at the upper quartile.
PRICE HISTORY
Over the full time period, Culp’s stock price performance has been variable and significantly below market. Between June, 2013 and April, 2024, Culp’s stock price fell -74%; relative to the market, this was a -92% loss. Significant price moves during the period: 1) February, 2021 – June, 2022: -75%; 2) April, 2020 – February, 2021: +143%; and 3) December, 2016 – April, 2020: -81%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -11.2% 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 February, 2024 of -11.2% is substantially below median relative to Culp Inc. Peer Group.
Current 5-year total return performance of -21.5% is lower quartile relative to the S&P 500 Composite.
Through February, 2024, with lower quartile current 5-year total return of -21.5% relative to S&P 500 Composite, Culp’s total return performance is lower quartile relative to Culp Inc. Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, CULP’s overall valuation is exceptionally low. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
Relative to Culp Peer Group, CULP’s overall valuation is quite low. Price/equity ratio is near the lower quartile. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
Culp has a major 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 0.26X to 0.71X. If CULP’s ratio of enterprise value/revenue were to rise to 0.71X, its stock price would be higher by $9 to $13.
For CULP to achieve upper quartile valuation relative to the Culp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.26X to 1.30X. If CULP’s ratio of enterprise value/revenue were to rise to 1.30X, its stock price would increase by $20 from the current level of $4.50.
VALUE TARGETS
CULP is expected to continue to be Value Creation neutral reflecting capital returns that are forecasted to be in line with the cost of capital.
Culp’s current Price Target of $4 is little changed from the current price of $4.50.
This moderately low appreciation potential results in an appreciation score of 33 (67% of the universe has greater appreciation potential.)
Reinforcing this moderately low Appreciation Score of 33, the low Power Rating of 26 contributes to an Value Trend Rating of F.
Culp’s current Price Target is $4 (-46% from the 2023 Target of $8 and -4% from the 04/10/24 price of $4.50). This dramatic fall in the Target is the result of a -30% decrease in the equity base and a -23% decrease in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted decline in cost of equity has a very large positive impact on the price/equity multiple. The forecasted growth has no impact. The forecasted decline in return on equity has a very large negative impact.
PTR’s return on equity forecast is 4.0% — slightly below our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2015 and 2023. The current forecast is significantly below the 2018 peak of 15%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2015 and 2023. The current forecast is significantly below the 2015 peak of 11%.
PTR’s cost of equity forecast is 4.8% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2015 and 2023. The current forecast is well below the 2019 peak of 10.3%.
At Culp’s current price of $4.50, investors are placing a negative value of $-6 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 6.6% versus a cost of equity of 6.1%.
PTR’s 2025 Price Target of $4 is based on these forecasts and reflects an estimated value of existing assets of $4 and a value of future investments of $0.
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