Hunting once again in the dark recesses of the small cap market for value, I have stumbled across Natuzzi, S.p.A (NYSE:NTZ) a designer, manufacturer and marketer of traditional leather and fabric-upholstered furniture such as loveseats and sofas. The company has 430 galleries worldwide, six production facilities and three warehouses.
Like Stanley Furniture Co. (NASDAQ:STLY), which also offers value and I have written about previously, Natuzzi, S.p.A (NYSE:NTZ) sells to the premium sector of the furniture market, and because of this the company has been hit hard by the recession over the past few years. Indeed, Natuzzi has not made a profit in the last five years. Still, the value on offer here is quite appealing.
Natuzzi may have hidden value
For a start, at the end of the second quarter, Natuzzi, S.p.A (NYSE:NTZ) had a net cash position of $28.7 million, current assets covered current liabilities 2.2 times and current assets covered total liabilities 1.6 times. Shareholder equity stands at $280 million giving a net asset value per share of $5.1, which at a current share price of $2.1 indicates a price-to-book value of 0.4. Moreover, the value of Natuzzi's current assets minus total liabilities stands at $2.2 per share, meaning that the market is placing no value on the company's $169 million in long term assets.
But enough about the valuation and deep value on offer, what about the company's outlook?
Natuzzi at the mercy of Italian government
Unfortunately, Natuzzi is based in Italy and this makes things very hard for the company. Italy is well known for its complicated labor laws and restrictions on hiring and employment (as well as serious taxation issues) and Natuzzi has fallen foul of these restrictions in recent months. There is also an issue with Natuzzi's management, who after six years of losses have only just noted the need to restructure.
Management has plans to fire 1,726 staff as part of a reorganization plan, however, these layoff have angered the Italian government, which has decided that it does not want the company to make so many of its staff unemployed. So, for the time being, this plan has been shelved. However, the company is in consultation with the government over planned layoffs, so there could be potential in the future.
Still, while the company waits it is burning through cash. Cash is flowing out of Natuzzi, S.p.A (NYSE:NTZ) at an average rate of $12 million a quarter, which has pushed the company to bolster its previously clean balance sheet with $26 million of debt. Having said that, at the end of the second quarter the company still had $72 million in cash, so even at a rate of $12 million a quarter, the firm has plenty of headroom with which to turn itself around.
My main concern about Natuzzi, S.p.A (NYSE:NTZ), is whether or not the company will be able to stage a recovery before it runs out of time. While the company currently has plenty of head-room on its balance sheet, the majority of its operations are based in Italy, a country that is notorious for its complicated labor laws and poor working practices. On the other hand, the company offers some deep value, so it just depends on how much risk you want to take. One thing is for sure, if the company's stock price moves back to the value of its assets, investors could see an upside of 143% - is it worth the risk?