The Razor's Edge

2-Year Price History

A Word Of Caution

While, we stand by our ratings methodology for long term value investors, sometimes smaller companies will be more volatile in terms of revenue, cash earnings, and other fundamental factors. Flexsteel Industries, Inc. (FLXS) is such a stock. Because many micro-caps are lightly traded their stock price can fluctuate because of a single large trade. Also, there is less analyst coverage of such micro-caps and therefore less information from which to base our ratings.

Therefore, (and as always), check additional sources and available information regarding FLXS before making an investment decision.

Ockham's Rating

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FLXS Revenue

As a value investing shop, we are interested in seeing how FLXS's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 0.30x and the low end of the range at 0.21x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for FLXS of 0.12x is well below its normal historic Price to Sales levels. At a price of $7.02, FLXS is 55% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

FLXS Cash Earnings

As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of FLXS, Ockham views their current Cash Earnings as significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from FLXS. For example, FLXS's Cash Earnings ratio per share has fluctuated between 6.78 and 9.80 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where FLXS is with respect to prior business periods.

So with FLXS's current price (latest close of $7.02) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, FLXS is 16% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn't exist in a vacuum. So if the market doesn't recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with FLXS.

FLXS Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.

In FLXS’s case, the estimated annual dividend is $0.52 resulting in a current dividend yield of 7.41%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from FLXS against the historic high and low levels over the past 10 years. The highest dividend yield from FLXS over this period was 7.78% while the lowest dividend yield was 2.14% If you are looking for some “bang for your buck” then a dividend yield of 49.40% above the historically median should be enticing. FLXS receives a positive boost in our view because as you know, equity at its core is simply a claim on future dividends.