The High Risk, High Reward Case for Crown Crafts, Inc. (NASDAQ: CRWS)

 By Tyler R. Martin

Crown Crafts, Inc. (CRWS) is an American apparel manufacturing company based in Louisiana. Through several subsidiaries, CRWS manufactures and distributes infant and toddler care products (ie. bottles, onesies, etc…) and maintains long term contracts with several big name vendors. Currently, Disney, Walmart and Target are the biggest and most attention grabbing examples. On the surface this looks like a rather simple buy. Factoring in the simple, wholesome all-american nature of the business, the consistent 6.10% dividend (.08 cents per share quarterly), the noteworthy distribution connections, and the rock bottom debt levels, Crown Crafts, Inc. (CRWS) would, on the surface, appear to be a good ol’ orphan and widows stock. However, the ever-growing presence of foreign manufactured goods in the US has depressed not only the fundamentals of this company, but more interestingly, the markets perception of this company’s future. So, as always, therein lies the opportunity to find a gem in the junk pile.

First, to shed a positive light on American manufacturing with some stats. According to the Bureau of Economic Analysis, in 2018 manufacturing comprised 11.6% of the US economic output, and manufactured goods made up more than half of US exports. Additionally, in 2018 the US added over 12.75 million manufacturing jobs. Based off these number, it would seem that American manufacturing, for at least the near future, is inclined towards an upward trajectory. Crown Crafts, Inc. (CRWS) at the time of this writing, stands at 5.23 dollars per share, 23 cents higher than the 52 week low and a dollar shy of the 52 week high. Approximately three years ago, despite similarly solid fundamentals, similarly low debt and the same dividend, CRWS stood at a very high 10.20 dollars per share. Given that the fundamentals have not improved over the past few years, and given that CRWS has struggled to maintain its earnings per share (EPS) and revenue (which is due largely to the loss of Toys R Us), one could certainly consider CRWS a very high risk high reward play. However, due to careful analysis of current market conditions, I personally believe that over the course of the next ~5 years, the manufacturing component of the American economy will prosper, especially if the tax system continues down the path of instituting beneficial tax laws. This is evidenced by the 2018 third quarter earnings growth announced at an eye popping 192%. It was due to this, and the massive sell off in the last three years, that I originally committed to purchasing CRWS. Additionally, a true value investor would agree that it is a sound investment strategy to select a company that survived a rough time in a cyclical industry, come out the other end relatively unscathed and to commit to actively accumulating shares while the market is still pessimistic about the industry.

Now some stats: Crown Crafts, Inc. (CRWS), is a very, very small company with a market cap of 53 million dollars. Its price/earnings is 10.53x, which is exemplary in comparison to the industry average of 26.23x earnings. Its price/sales (which is telling for a product-centric industry like textiles) is a very low .68x earnings compared to an industry average of 2.90x. CRWS maintains a very healthy dividend of 6.10%, but has remained unchanged in the last five years. However, the preservation of this dividend seems very likely, due to a comfortable 66% payout ratio and a very solid dry powder reserve with a current ratio of 3.51.

Analysis: Crown Crafts, Inc. (CRWS) is a strongly positioned, niche company in a battered industry. Due to how effectively it weathered a tumultuous time in the US economy, it can easily be assumed that CRWS will outperform its peers as the industry rebounds. The savvy investor should stock up on this must have company for every (enterprising) value investor’s portfolio.

Full disclosure I personally own shares of CRWS and plan to continue accumulating shares

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