by Oct 25, 2019Stock Write-Ups2 comments

*Please note that I wrote this article a few weeks ago so reference to share price information will not be accurate compared to what the stock is trading for on the date it was published*

Almost 2 years ago I wrote about Tandy Leather Factory (NASDAQ: TLF).  Some readers will have some awareness of the stock and its most recent fall from a 52-week high of close to $8.01 per share to its current trading price of $4.37 per share.  Shareholders of Tandy have had a rough ride on what I perceived to be a company with a wide moat and a professional capital allocator steering the ship.

Originally, I thought that Tandy stock had a bright future ahead of it relative to the market at the time.  The stock wasn’t heavily discounted compared to its intrinsic value, but it also wasn’t trading over it either.  I was originally operating under the assumption that it could return at least 7% per year if you held the company for 10 years based on a combination of my estimated owners’ earnings yield, earnings growth and management’s ability to return on capital to shareholders via buybacks and dividends.  Under the same assumptions, but with a much cheaper stock, you could achieve a much higher return at today’s stock price.  The question however is if my original evaluation of the quality of Tandy’s business still holds up.

There are 3 big things that have changed since my original article was published.  Earnings have taken a very big dive, former CEO Shannon Greene resigned and now TLF has failed to report their Q2 earnings due to speculation of a large write-down of their inventory. 

When I wrote my original article, it was well known that their growth was slowing, and management had taken up some initiatives to increased sales.  Over time it became evident that these strategies have not worked out all that well. Earnings have fallen from a peak of $7.7 million to just over $ 1.9 million in this past year. 

Their financial position however is still very strong, with lots of cash, no debt and profitable operations.  As it stands today the market value of the company is trading significantly below their book value and is approaching “net-net” status.  Since May 2018 they have purchased close to 3% of their own stock back from 9.1 million shares outstanding to 8.9 million in 2019 Q1.  I can only hope, with price levels where they are today, that the company has continued to increasingly buy its own shares.

As an investor, what we are trying to figure out is the probability that this company’s earnings will rebound to more historic levels and what our margin of safety is if this doesn’t occur.  TLF has been around for 100 years.  The hobby has cycles occasionally and is unlikely to grow into a billion-dollar business unless they find a way to expand into a completely different market. There are limits to its growth.   

The more I think about its economics the more I think about See’s Candy and how Warren Buffett attempted a few times to grow the business outside of its California stronghold with limited success. Perhaps management should give up on TLF’s growth aspirations and just be happy with a profitable business that can grow earnings with inflation and take advantage of buying back stock at reasonable prices. This may be the strategy that management takes going forward.

I believe Tandy at today’s price is a safe bet.  I have a few doubts that the business is as good as I once thought. Growth options for the future don’t seem to be existent outside of inflation but I think there will still be a small rebound in the company’s overall owner’s earnings to a more normalized level around $5 million.  With a multiple of 12 applied to its business you would get an intrinsic value of $60 million which is almost a 60% upside to today’s stock price.  This return may be larger depending on management’s ability to buy back stock at attractive levels over the next few years as well. 

I have added a small position in TLF at an average cost of around $5.45.  It’s still a decent business with able management and I think you could get a decent return given the opportunity for buybacks at a depressed stock price. You just might have to wait a bit and withstand a bit of volatility. 

Welcome to StockWriteUps.com!

My name is Alex Middleton and I am from Calgary, Alberta.  I believe investing requires one to carefully study publicly available information in an attempt to develop a thesis based on reason and logic.  It also requires one to properly account for the unknown by applying probabilities and margin of safety to their thesis.  I hope you enjoy the content!