PSB Monthly Issue August 2011

| August 2, 2011

August 2011


By this point, most investors realize the future of telecom is wireless.  Most phone calls made these days are from a wireless device.  And wireless internet is not far from dominating the market as well.

In the telecom industry, the major players have already made the strategic shift to a business model based on wireless services and products.

It’s not surprising… those companies wouldn’t be where they are if they hadn’t embraced wireless innovation early on.

But while most companies have shifted their focus to wireless technology, the telecom industry still has room for further innovation.

Not to mention, there’s plenty of profit potential left in the industry.

Check this out…

Worldwide telecom revenues have recently been estimated at $3.9 trillion.Over half of those revenues are related to communication equipment.

Surely there’s room for an up and coming telecom equipment company to grab a piece of that gigantic pie?

A smaller company with astute management and innovative products could really thrive in the industry.

One company that fits the bill is Westell Technologies (NASDAQ: WSTL).

Let’s take a closer look…

Key Investment Data

Name:  Westell Technologies
Ticker Symbol:  WSTL
Market Cap:  $205 million
Recent Price:  $2.85

PSB Rating System 4.7 Stars

Raging Revenue:  (4.5 stars) Last quarter’s revenues were down slightly due to the sale of the CNS division.  More importantly, the outlook for 2012 is promising with the launch of Homecloud.

Beautiful Books:  (4.8 stars) Earnings are expected to climb 21% in 2012.  And strong demand could drive that estimate even higher.  The balance sheet is rock solid with $110 million in cash and no debt.

Stellar Structure:  (4.6 stars) Institutional ownership is a robust 50% of shares outstanding. Institutions are clearly confident in the company’s health and growth potential.

Valuation Verification:  (4.9 stars) Despite impressive growth potential, the stock is dramatically under-valued.  Based on our valuation analysis, we think the stock is worth at least $4.98 a share.  That’s upside potential of 75%.

Meaningful Milestones:  (4.7 stars) The company has been profitable for nine straight quarters.  And with new, innovative products on the horizon, profits should continue rolling in coming quarters.


Westell is a leading provider of high speed communication equipment and conferencing services.  Their products and services are used in broadband, digital transmission, power management, and remote monitoring by telephone companies and telecom service providers.

The company’s divided into three divisions. Outside Plant Systems develops products for use in the outdoor plant environment. ConferencePlus is a provider of conferencing services.  And Homecloud is a new unit that will soon offer a home-based system for application and storage sharing.

WSTL’s products are used by a mix of industrial, business, and retail consumers. And the company’s multiple product lines should help protect against major swings in projected revenue.

Here’s the deal…

WSTL’s management is focusing on innovation.  And they’re proving they can make shrewd, strategic decisions regarding the company’s future.

For one, they just sold off their highest revenue division, Customer Networking Solutions (CNS), to NETGEAR (NTGR).

How is selling off your top revenue producer a good thing?  Because the division was flat in terms of operating income.  In other words, CNS generated revenues but no profits.

You see, CNS products – essentially high speed routing equipment – are commoditized in today’s market.  There was little chance WSTL was going to milk any more profits out of the division.  Meanwhile, CNS was a better fit for NETGEAR – who specializes in mass produced, generic routing equipment.

Here’s the best part of the CNS sale…

WSTL pulled down $33 million in cash from the transaction.

I’ll talk more about WSTL’s strong cash position in a minute, but first let me say this. The company’s cash hoard is a big asset as it enables WSTL to make acquisitions or introduce new products.

For example, management’s leveraging their cash position in order to market their new Homecloud product.  And that’s an excellent use of the cash.

As I mentioned earlier, Homecloud is a retail product.  It allows consumers to quickly and easily connect their home-based wireless devices together for file sharing, backup, and data safety.  That includes your cell phones, tablet PC, computer, and television. It’s basically a personal cloud for your house.

There are several great things about this product.

Homecloud utilizes cloud technology – an area rapidly gaining in popularity and demand.  What’s more, it’s an innovative product that’s very easy to use.  I don’t think it’s a leap of faith to envision one of these in every household someday.

Finally, because it’s designed for the retail consumer, Homecloud should command higher margins… and bigger profits.

One more thing…

WSTL management is in the process of a major share repurchase program.  They recently bought back 1.7 million shares worth nearly $6 million… and they’re authorized to repurchase another $3.5 million this year.

Remember, share repurchases are almost always positive for investors.  It reduces share dilution and shows management’s faith in their company.

Innovative products… strong management… so how about the financials?


Despite the challenging economy, WSTL’s financial numbers are in good shape.

Last quarter, revenues dipped to $34.4 million from $41.3 million a year ago.  However, the revenue decrease resulted from the sale of the CNS division.  Basically, it’s a non-recurring event and nothing to worry about.

Meanwhile, net income jumped to $21.1 million, a 357% increase.  Though, the large positive increase was driven by the sale of CNS.  Take out the division’s sale and net income decreased slightly year over year.

Considering the current economic climate and the change of strategic direction for the company, a slight drop in quarterly net income isn’t a big deal.

More importantly, WSTL’s balance sheet is rock solid.

The CNS sale added to the company’s already impressive cash position.  They’re sitting on a cash hoard of over $110 million with virtually no long term debt.  Moreover, their current assets are a superb 5.7x current liabilities.

Keep in mind, the strong cash position means WSTL can focus on marketing new products (such as Homecloud), acquiring other companies, and continuing their purchases of WSTL shares.

It seems clear to me that management is optimizing the company’s strong balance sheet.  And that’s a great sign for shareholders.


As with any investment, Westell has its risks.

A global economic slowdown could reduce overall demand.  Fewer consumers purchasing telecom equipment could potentially impact the company’s revenue.

Another risk is the potential for new technology to hit the market which could cut into sales of WSTL’s products.

And, if additional competitors enter the markets serviced by WSTL, margins on current product offerings could get squeezed.


WSTL is a healthy company with a strong management team… but you wouldn’t know it from the price of the shares.

Currently, the stock is trading at an extreme discount.

As of this writing, the shares are trading at a miniscule 2.4x earnings.  No matter what industry a company’s in, a 2.4x P/E ratio is shockingly low… especially for a company projected to grow earnings by 21% next year and 12.5% per year over the next five years.

But let’s take a more conservative approach…

Based on projected earnings, WSTL is still priced at a very reasonable 12.8x.  The industry average P/E for telecom equipment companies is 22.4x.  That translates to astellar 75% increase if WSTL were to trade up to industry average levels.

And with the company’s new Homecloud product and their huge cash position, we think the share price could go even higher.

Based on our analysis, we see the stock trading up to at least $4.98.  Grab your shares of WSTL now for potential gains of 75%!


BUY Westell Technologies (NASDAQ: WSTL) up to $3.25 per share.

Recent price is $2.85.

Use a stop-loss of $2.00 on this position.

Don’t forget your position sizing and stop-loss rules.



The housing market remains a shambles almost three years after the devastating financial crisis began in the fall of 2008.

Millions are still stuck in homes worth less than what they owe on their mortgage.  A seemingly never-ending stream of foreclosures and abandoned homes continues to pressure home prices lower.  And thanks to highly restrictive lending policies, it’s near impossible for anyone to get a mortgage.

As a result, the housing market continues to bump along what some analysts are calling “the bottom”.

It’s discouraging we haven’t seen clearer signs of a turnaround in housing.  But we just might be getting closer to it.  A new report by the Joint Center for Housing Studies of Harvard University suggests the housing market is poised to turn on a dime.

Sharp drops in home prices and interest rates have made many homes across the country more affordable than they’ve been in decades.  Only high unemployment and tightened lending standards are keeping many first time homebuyers on the sidelines.

However, we know this group is poised to go on a buying spree once the economy improves.  Remember, first-time homebuyers taking advantage of the 2010 homebuyer tax credit spurred strong growth in home sales and prices last year.

And, once this group gets going, it could spark a broader recovery in housing.

Of course, a housing market rebound would be great news for homebuilders, real estate developers, and realtors.  But it would also provide a big boost for other related industries like home furnishings… particularly the bedding industry.

It makes perfect sense.  One of the first things homeowners buy when furnishing a new home is a new bed.  Let’s face it, we spend a third of our lives in bed, so we might as well be comfortable, right?

And here’s the really interesting part of this story…

The bedding industry’s recovery is already under way.  After a dismal 2009, the industry made good progress on a turnaround last year.  The International Sleep Products Association (ISPA) reports industry sales increased 6.2% in 2010.

That ended four straight years of sales declines.

Now, a 6.2% increase may not sound like much, but it’s a big improvement over 2009’s figures.  That year saw sales plunge by nearly 9% year over year.

Even better, the ISPA’s forecasting strong growth in 2011 and 2012.  They’re expecting unit sales to increase 4% this year.  And they’re looking for a 3.5% increase next year.

Here’s the key…

Rising demand for mattresses and bedding products is great news for one penny-sized company in particular.  And that company is… Culp Inc. (NYSE: CFI).

Key Investment Data

Name:  Culp
Ticker Symbol:  CFI
Market Cap:  $119 million
Recent Price:  $8.92

PSB Rating System 4.6 Stars

Raging Revenue:  (4.3 stars) Revenues are poised to grow faster as a recovery in the bedding products industry gains steam. Stronger demand for bedding products should translate into higher sales of the company’s mattress fabrics.

Beautiful Books:  (4.5 stars) Earnings are projected to grow 23% annually over the next five years. And with $30 million in cash, manageable debt, and surging cash flows, this company sports a solid balance sheet.

Stellar Structure:  (4.8 stars) Insider ownership is quite robust at 24% of shares outstanding.  And strong institutional ownership of 63% shows the smart money likes this company a lot.

Valuation Verification:  (4.9 stars) Despite a positive outlook, the stock is nicely undervalued.  Based on our valuation analysis, we think the stock is worth at least $17.85 a share.  That’s upside potential of 100% or more.

Meaningful Milestones:  (4.5 stars) After a string of sales declines, the company’s recorded back to back increases in annual revenues.  And the company’s returned to profitability.

Culp is the largest producer of mattress fabrics in North America.  And they’re one of the largest marketers of upholstery fabrics on the continent as well.

If the recovery in demand for bedding products continues gaining steam, this upstart little company should see revenues and profits explode to the upside.  And you know what that means… a significantly higher stock price down the road!

Let’s take a closer look at this hidden gem…


Culp’s business is divided into two distinct segments.  The Mattress Fabrics segment makes woven and knitted fabrics used for covering mattresses and box springs.  And the Upholstery Fabrics segment makes a variety of fabrics used in the production of residential and commercial upholstered furniture.

In fiscal year 2011 (ended in May), mattress fabrics accounted for 56% of revenue and upholstery fabrics made up the rest.

Don’t let Culp’s small market cap fool you. They’re truly a global company in every sense of the word.  They have production facilities in the US and Canada for making mattress fabric products.  And since 2004, the company’s been manufacturing upholstery fabrics at their plant in Shanghai, China.

What’s more, Culp recently established a new subsidiary called Culp Europe.  Based in Poland, this entity markets upholstery fabrics to furniture manufacturers in the European market.  A wise decision since the European market makes more than 40% of the world’s furniture.

But here’s what I really like about Culp…

The company has reinvented itself over the past decade.

In the Mattress Fabrics segment, Culp has made significant investments to increase their competitive position.  The company spent $33 million on faster, more efficient weaving machines and increased knit machine capacity.  And they also purchased high technology finishing equipment for woven and knitted fabrics.

Now, these capital expenditures have hampered Culp’s financial results over the years. But now the modernization and expansion effort is finally complete.  This means significantly lower capital expenditures going forward.

But that’s only part of the story…

Culp also invested $11.4 million in 2009 to acquire their supplier of knitted mattress fabric.  This was a very smart move as sales of knitted fabrics are growing much faster than other mattress fabric categories.

As for the Upholstery Fabrics segment, Culp essentially tore it down and rebuilt it.

Over the past decade, demand for US produced upholstery has declined significantly. Customers have increasingly purchased less expensive fabrics from China-based manufacturers.  As a result, Culp has aggressively reduced their US manufacturing costs.

The cost cutting effort involved shutting down all but one US based manufacturing plant and one upholstery distribution facility.  At the same time, Culp established operations in China, where labor’s much cheaper.

These moves have lowered the company’s operating costs dramatically.

The result… after ten years of declines in the upholstery fabrics business, Culp has produced back to back years of sales gains.  And the business has returned to profitability.

It certainly sounds like things are turning around at Culp.  Let’s take a look under the hood…


As I mentioned earlier, the bedding industry is in the midst of a turnaround after the 2008 financial crisis and global economic recession.  And while demand is gradually returning to normal, Culp’s financials are still being impacted by slower than usual industry growth.

Nevertheless, signs of a turnaround are clearly evident.

Just take a look at the numbers for fiscal year 2011, which ended in May…

Revenues increased by a solid 5% year over year to nearly $217 million.  While the growth is nothing stellar, it marks the company’s second consecutive annual sales increase since the recession began in 2008.

What’s more, Culp’s making nice strides in boosting profitability.  Net income surged 23% in FY 2011 to an impressive $16.2 million.  And earnings jumped 21% to $1.22 per share.

Clearly, Culp’s capital investments and cost-cutting efforts are starting to pay off.  And I think the payoff will continue for many quarters to come.

But despite the company’s obvious financial recovery, analysts remain very conservative with forward earnings estimates.  They’re forecasting an 11% decline in earnings for fiscal year 2012 and just an 8% increase for fiscal year 2013.

And I couldn’t be happier…

By low-balling their estimates, analysts have set the stage for upside earnings surprises.  Remember, nothing gets a stock moving like better than expected earnings.

Why do I think Culp will perform better than analysts expect?

It’s simple. A recent consumer survey by Furniture/Today and HGTV Mattress shows the bedding industry’s turnaround is about to accelerate.

The survey asked consumers about their mattress buying plans for 2011.  And the results were just what the industry was looking for.  A hefty 46% of respondents said they plan on buying a mattress this year.

That’s a solid increase over the 31% who said they planned to buy a mattress in 2010.

No question about it, many consumers put off buying a mattress in 2010 due to the fragility of the economic recovery.  And the delay has created a situation which economists describe as pent-up demand.

This is great news for the bedding industry and for Culp.

Pent-up demand is very powerful. When the dam bursts and consumers finally begin to buy, it often accelerates into a buying frenzy.  And nothing could be better for Culp than legions of consumers itching to buy mattresses and upholstered furniture.

But you don’t have to take my word for it…

Let management’s actions speak for themselves.

Culp’s board of directors just authorized a $5 million share repurchase program.  In other words, management is going to buy Culp stock through open market purchases.  Nothing says “I have confidence in my company” like a stock buyback program.

Clearly, the future’s looking bright for Culp.

And strong growth potential isn’t the only reason I’m excited about the company. They also boast a solid balance sheet.

As of the most recent quarter, Culp’s sitting on a veritable cash hoard of $30 million. That works out to about $2.33 per share.  And debt is clearly manageable at just under $12 million.

But the best part is the company’s surging cash flows… Over the past 12 months, Culp has generated operating cash flows of $14.8 million.  Strong positive cash flows are a great sign of a healthy, growing company.


Of course, an investment in Culp is not without risk.

The company’s positive outlook depends on the global economic recovery continuing. If the recovery fizzles, it could impact spending for Culp’s mattress and upholstery fabrics.

Another risk is the potential for surging commodity prices.  High commodity prices drive up Culp’s raw material costs and could eat into profits.

A third risk is the potential for higher tariffs on imported bedding products.  Domestic manufacturers are lobbying hard for tariffs on drastically cheaper imports.  If they’re successful, it could hurt demand for Culp’s products.


No question about it, Culp shares are ready to make a substantial upward move.

Pent-up consumer demand is poised to ignite a flurry of mattress sales in the months ahead.  The bedding industry’s turnaround is gathering steam.  And the housing market’s emerging recovery could spur robust demand for new mattresses and upholstered furniture.

Bottom line…

Stronger demand for mattresses and upholstered furniture means higher sales of Culp’s mattress and upholstery fabrics.  And thanks to the company’s comprehensive restructuring, higher sales should translate into significantly higher earnings going forward.

Nevertheless, CFI is trading at a nice discount.

At a recent price of $8.92, the stock’s trading at just 9x analysts’ 2012 estimate of $1.05 per share.  That’s a low P/E for a company projected to grow earnings 23% annually over the next five years.  And it’s well below the industry average P/E of 12x earnings.

If CFI were to trade up just to the industry average, the shares would have to jump by 35%.  Nothing wrong with that.

But I think the stock is poised for even bigger gains.  As the company continues to impress with their financials, investors will likely drive the share price up to a level consistent with the company’s projected earnings growth.

In other words, we’re likely to see Culp’s P/E expand from 9x to something closer to 23x.  If we use a conservative P/E of 17x, you get a potential price target of $17.85.

That’s upside potential of 100%!

And don’t forget, analysts’ earnings estimates are probably overly conservative.  If Culp consistently delivers better than expected earnings, we should see an even bigger P/E and of course… an even greater profit on our position.

Based on our analysis, we see CFI trading up to at least $17.85.  Buy shares now for potential gains of 100% or more.


BUY Culp (NYSE: CFI) up to $9.81 per share.

Recent price is $8.92.

Use a stop-loss of $4.46 on this position.

Don’t forget your position sizing and stop-loss rules.


Portfolio Update

  • Most of our stocks have been trading in line with the market over the past couple weeks.  In August, many of our companies will be reporting earnings. We’ll be sure to cover the meaningful news at our mid-month update.

Category: PSB Monthly Issues

About the Author ()

Comments are closed.