Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

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<h2>KEY POINTS</h2>
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<li>After market close Wednesday, Culp reported a 4Q22 loss of $0.49 per share, roughly in line with consensus of a loss of $0.50 per share as reported by YCharts, and well below the prior year’s non-GAAP profit of $0.11 per share. Culp pre-released results in late April. The operating loss was less than indicated and better than our revised estimate. See attached for our variance analysis. Revenues were roughly in line with consensus of $56.9 million, but modestly below our estimate.</li>
<li>As expected, Culp was hit hard by the COVID-related shutdown in China. The China disruption was compounded by the weakening of domestic mattress fabric demand. Chinese employees began to return to work by the end of 4Q22.</li>
<li>The announcement that Culp would suspend the dividend, ending nine years of continuous payments, overshadowed the results. It sent the stock 14.5% lower in the after market to $4.30.</li>
<li>The slowdown in end-markets is likely to persist for several quarters. Culp’s customers appear to be sitting on inventory. In channel checks, there is evidence that the inventory backup extends to the sales floor.</li>
<li>Gloomy? If your name were Benjamin Graham, you might think differently. Savvy investors with a Graham-bent might take a step back and look at the balance sheet. Culp carries no bank debt, modest operating lease obligations ($7 million) and some long-term tax liabilities ($3.1 million). The company carries $14.5 million (or $1.19 per share) of cash on the balance sheet and current assets exceed current liabilities by $75 million. The book value of the company stands at $119.5 million (or $9.78 per share).</li>
<li>The stock at the after-hours price of $4.30 represents a market cap of $52 million, less than net current assets minus liabilities and 43% of book.</li>
<li>The economic headwinds and the supply chain issues (both shortages and inventory gluts) deserve continued monitoring. In this context, the dividend cut can be seen as another step in the conservative balance sheet management. Management will hold its earnings conference call at 11 am EDT on Thursday.</li>
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<h2>COMPANY OVERVIEW</h2>
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<p>Founded in 1972 and headquartered in High Point, North Carolina, Culp, Inc. manufactures, markets, and supplies a wide range of mattress and upholstery fabrics in the US and across the globe. Today Culp has manufacturing and sourcing capabilities in the US, Canada, China, Haiti, Vietnam, and Turkey.</p>
<p>Culp reports operations in these segments: (1) mattress fabrics, known as Culp Home Fashions (CHF), and (2) upholstery fabrics, known as Culp Upholstery Fabrics (CUF). Each is a leader in its respective markets.</p>
<p>Robert. G. Culp IV (Iv) became CEO in January 2020. He joined the company in 1998 and for 15 years led Culp’s mattress fabric segment. Culp’s innovation reinforces the market leadership that it enjoys in each of its two reporting segments.</p>
<h2>DISCLOSURES</h2>
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<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Budd Bugatch, who is the writer of this report, covers the Consumer sector for WTR. Mr. Bugatch and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>
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KEY POINTS


After market close Wednesday, Culp reported a 4Q22 loss of $0.49 per share, roughly in line with consensus of a loss of $0.50 per share as reported by YCharts, and well below the prior year’s non-GAAP profit of $0.11 per share. Culp pre-released results in late April. The operating loss was less than indicated and better than our revised estimate. See attached for our variance analysis. Revenues were roughly in line with consensus of $56.9 million, but modestly below our estimate.
As expected, Culp was hit hard by the COVID-related shutdown in China. The China disruption was compounded by the weakening of domestic mattress fabric demand. Chinese employees began to return to work by the end of 4Q22.
The announcement that Culp would suspend the dividend, ending nine years of continuous payments, overshadowed the results. It sent the stock 14.5% lower in the after market to $4.30.
The slowdown in end-markets is likely to persist for several quarters. Culp’s customers appear to be sitting on inventory. In channel checks, there is evidence that the inventory backup extends to the sales floor.
Gloomy? If your name were Benjamin Graham, you might think differently. Savvy investors with a Graham-bent might take a step back and look at the balance sheet. Culp carries no bank debt, modest operating lease obligations ($7 million) and some long-term tax liabilities ($3.1 million). The company carries $14.5 million (or $1.19 per share) of cash on the balance sheet and current assets exceed current liabilities by $75 million. The book value of the company stands at $119.5 million (or $9.78 per share).
The stock at the after-hours price of $4.30 represents a market cap of $52 million, less than net current assets minus liabilities and 43% of book.
The economic headwinds and the supply chain issues (both shortages and inventory gluts) deserve continued monitoring. In this context, the dividend cut can be seen as another step in the conservative balance sheet management. Management will hold its earnings conference call at 11 am EDT on Thursday.

COMPANY OVERVIEW

Founded in 1972 and headquartered in High Point, North Carolina, Culp, Inc. manufactures, markets, and supplies a wide range of mattress and upholstery fabrics in the US and across the globe. Today Culp has manufacturing and sourcing capabilities in the US, Canada, China, Haiti, Vietnam, and Turkey.
Culp reports operations in these segments: (1) mattress fabrics, known as Culp Home Fashions (CHF), and (2) upholstery fabrics, known as Culp Upholstery Fabrics (CUF). Each is a leader in its respective markets.
Robert. G. Culp IV (Iv) became CEO in January 2020. He joined the company in 1998 and for 15 years led Culp’s mattress fabric segment. Culp’s innovation reinforces the market leadership that it enjoys in each of its two reporting segments.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Budd Bugatch, who is the writer of this report, covers the Consumer sector for WTR. Mr. Bugatch and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.








4Q22 Earnings Results; Modestly Better than the Pre-Release; Still Not Pretty; Dividend Suspension Weighs Heavily

Culp Inc

4Q22 Earnings Results; Modestly Better than the Pre-Release; Still Not Pretty; Dividend Suspension Weighs Heavily