Tom Sandell‘s Sandell Asset Management‘s has sent a letter to the Chairman and CEO of Ethan Allen Interiors Inc. (NYSE:ETH), Farooq Kathwari, in which it expressed its belief that the stock is trading at a discount to its intrinsic value of around $41 per share. The investor, which holds around 1.60 million shares, equal to 5.5% of the company’s stock, considers that the undervaluation of shares is supported by a combination of sub-optimal fiscal policies and inefficient allocation of shareholder capital.
Sandell also considers that Ethan Allen Interiors Inc. (NYSE:ETH), whose stock underperformed its peers by around 119% over the last decade, can enhance its shareholder value through recapitalization and monetization of its real estate holdings, or through a sale to a private equity firm. The investors consider that one of these paths could result in a value of at least $41 per share delivered to shareholders, which represents a 30% premium above the current price of the stock.
In this way, the blame for the company’s poor performance lies on the shoulders of the entire board of directors, four of whom have been sitting on the board for more than 10 years (including Kathwari, who was appointed to the board 27 years ago). Sandell added in the letter that it is prepared to nominate a slate of director candidates for election at the company’s 2015 Annual Meeting.
“As a final note, please understand that unlike many chief executives of publicly-traded companies that we have encountered, we hold you in higher regard for the meaningful amount of stock that you personally own. It is our hope that we can engage in immediate dialogue in order to devise a solution that will result in a dramatic enhancement of shareholder value,” Sandell concluded.
Mr. Sandell’s stance regarding Ethan Allen Interiors Inc. (NYSE:ETH) is not news, as he has previously pitched the company at the Delivering Alpha Conference that took place in New-York in June. Back then he said that the company has a very large real estate portfolio, worth around $450 million, which represents a value of around $16 per share, very little of which is reflected in the stock price. The investor added during the conference that the company could use to recapitalize and buy back stock. He also said that he was approached by some third parties, which expressed interest in acquiring Ethan Allen.
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Ethan Allen Interiors Inc. (NYSE:ETH) is a $900 million interior design company that manufactures furniture and sells it through stores, which it owns. The company has eight manufacturing facilities in the US and two plants in Honduras and Mexico. Ethan Allen’s stock inched up by 2% on the back of Sandell’s letter, but it appreciated by more than 5% on July 15th during Sandell’s panel at the Delivering Alpha.
Overall, smart money were not so keen on Ethan Allen Interiors Inc. (NYSE:ETH) at the end of March and Sandell’s involvement will most likely increase the stock’s popularity. We follow hedge fund activity that surrounds a stock because we determined that retail investors can benefit from their stock picking skills, despite the fact that hedge funds underperformed the market significantly for the last several years. It is especially useful to follow hedge funds’ small-cap ideas, because our research has shown that a portfolio of most popular small-cap stocks among hedge funds can annually beat the market by double digits. Our strategy, which is based on imitating a portfolio of 15 top small-cap picks among 700 funds, has returned 123% since August 2012, and outperformed the S&P 500 ETF (SPY) by as much as 65 percentage points (see more details here).
In this way, as it has been stated, hedge funds seem to be bullish on Ethan Allen Interiors Inc. (NYSE:ETH), taking into account that at the end of March, 14 funds held around $183.8 million worth of stock, representing around 23% of the company, which is not surprising for a small-cap stock. Moreover, during the first three months of 2015, the number of funds with long positions declined from 16 funds, which owned around $205.81 million in stock at the end of December. Aside from Sandell, which boosted its stake during the second quarter, another shareholder of Ethan Allen is Chuck Royce‘s Royce & Associates, which trimmed its position to 3.07 million shares reported in its latest 13F for the end of June. The same trend can be noticed by looking at 13F filings of Crispin Odey’s Odey Asset Management and Mario Gabelli’s GAMCO Investors, which cut their stakes to 1.80 million shares and 347,900 shares respectively.
Mr. Sandell is most likely to succeed in his endeavor to increase the value of Ethan Allen Interiors Inc. (NYSE:ETH) in one way or another. Taking into account that shareholders have been losing money in the last years, they will support Sandell, while other investors might also be interested in going long in the stock, betting on a positive outcome.
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