BSET - Bassett Furniture: 2 Takeover Offers 12% Dividend 52% Net Cash

Summary

• This is our 3rd Portfolio stock to receive a takeover offer in past 3 months, with Pzena Investment Management [PZN] being acquired for a 66% premium in August.
• BSET receives 2 bids, including a $21.00 all-cash offer [a 27% stock price premium] – but BSET has rejected the offer as being opportunistic.
• $9.20 net cash per share represents 52% of the stock price.
• 12.0% dividend yield for 2022, including a large Special Dividend.
• Stock is up +67% since our initial recommendation in September 2020; we have a neutral rating on the shares.

Two Takeover Offers Received

CSC Generation Holdings has made 2 unsolicited offers to acquire Bassett ( BSET ) over the past several months. The most recent offer, disclosed yesterday, is an all-cash offer at $21.00 per share. Investors will recall that CSC previously made a similar all-cash offer for another furniture manufacturer Flexsteel [FLXS], which was rejected by that firm. BSET has also announced, after the close, that they have rejected the offer, on the grounds that it undervalues the firm from a long-term perspective. BSET's Board has stated that it is an "opportunistic" offer which seeks to acquire the company when the USA is experiencing a huge stock market decline, a recessionary economy, and rising interest rates significantly beginning to impact the housing market and consumer spending.

We doubt CSC will increase its offer, as it didn't increase its offer after Flexsteel's rejection either. Short-term, and risk-averse, investors should take advantage of this takeover scenario to book profits in BSET's stock, in our opinion.

Severe Macro Headwinds, Cheap Valuations

All investors are aware of severe macro headwinds now facing the housing industry, including sharply rising interest rates impacting mortgage rates, stress on consumer spending due to higher inflation and gas prices, stock/bond market losses, and an overall recessionary environment. Cyclical stocks like BSET are also facing downward pressure.

For those investors with a short-term time horizon, and seeking to preserve capital, it is prudent to sell your shares on this takeover announcement. The stock is up 67% since our initial recommendation, and could drift lower after the bid rejection.

For long-term investors with a multi-year time horizon, BSET's stock has very low valuations. Adjusted for $9.20 in net cash [zero debt], the stock is trading for only about 4.3x normalized $2.00 in earnings. In fact, consensus Wall Street estimates [2 analysts] are at $2.27 for FY 11/2022, and $2.10 for FY 11/2023. Recently these estimates were revised downwards, and given earnings trends across the USA, further downgrades are likely.

12.0% Full-Year Dividend Yield in 2022

As discussed previously, BSET had declared a Special Dividend of $1.50 per share of common stock to shareholders in March this year. Also, the regular quarterly dividend has been increased in July from 14 cents to 16 cents per quarter, or $0.64 annualized.

This is the second Special Dividend paid by BSET during the past three years - please see the following chart. Investors should note that BSET will still have $9.20 in net cash per share even after the special payout a few months back.

Including the $1.50 Special Dividend, and the run-rate $0.64 annual regular dividend, the 2022 full-year dividend to shareholders is $2.14, or a 12.0% annual yield.

In addition to a robust dividend, the company had also increased its share repurchase authorization to $40 million [25% of the current market cap] several months ago. The Special Dividend and share repurchases will give Bassett flexibility regarding disciplined capital allocation. The company has stated, "We will remain opportunistic with share repurchases while continuing to evaluate our capital allocation strategy."

Risks and Opportunities

BSET presents a complicated set of both opportunities and risks. The positive secular drivers for furniture demand include some permanent WFH [work from home] effect even post Covid, people migrating out of large cities and high tax states for numerous well-publicized reasons, the large Millennial generation buying houses, high apartment rental inflation, etc. USA home prices were in a strong bullish environment till a few months ago.

On the negative side, investors are too well familiar with mortgage rates now at multi-year highs over 7%, and numerous concerns surrounding inflation and the economy. The housing sector, and with it tangential furniture demand, is slowing down rapidly due to these concerns.

Conclusion: Cyclical Downside with Low Valuations

Cyclical stocks are always difficult to analyze around economic cycle turning points. For those investors with a short-term time horizon, and seeking to preserve capital, it is prudent to sell your shares on this takeover announcement. The stock is up 67% since our initial recommendation, and could drift lower after the bid rejection.

For long-term investors with a multi-year time horizon, BSET's stock has very low valuations. Adjusted for $9.20 in net cash [zero debt], the stock is trading for only about 4.3x normalized $2.00 in earnings. On a normalized basis, and assuming an eventual recovery in the USA economy and lower interest rates, BSET's stock is worth much more than its price today.

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