We came across a bullish thesis on Culp, Inc. (CULP) on Twitter by SebKrog. In this article, we will summarize the bulls’ thesis on CULP. Culp, Inc. (CULP)’s share was trading at $5.28 as of Nov 1st. CULP’s trailing P/E was 39.50 according to Yahoo Finance.
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The restructuring of Culp, Inc. (CULP) presents an intriguing investment opportunity, particularly as two well-known value funds hold significant stakes in the company. CULP, a U.S. mattress manufacturer and upholstery distributor, has historically been a stable player, generating around $30 million in EBIT during its peak years. However, the company’s current market capitalization stands at approximately $75 million, following a challenging period that began in 2018 with increased competition from inexpensive Chinese imports. The COVID-19 pandemic initially spurred demand in the mattress industry, but since 2022, inflationary pressures have led to a significant downturn, leaving the sector at historic lows.
In response to these challenges, CULP has announced a restructuring plan aimed at stabilizing its mattress segment, which includes the sale of one of its warehouses for $10-12 million after tax. The goal of this restructuring is to return the mattress division to at least breakeven, even in a subdued demand environment. On the other hand, the upholstery segment has remained profitable throughout this turmoil, benefiting from its asset-light model, as it sources products primarily from China.
A critical aspect of CULP’s current situation is its shareholder composition. The involvement of 22NW, which holds about 10% of the shares and has recently secured a board seat, is particularly noteworthy. This firm has a history of successful activist campaigns, including one for DIRTT. Additionally, Gate Capital also owns 10% of CULP, while insiders hold minimal stakes, creating a potential catalyst for activism if the management fails to effectively execute its restructuring plans.
In terms of valuation, there are three potential scenarios to consider. In a worst-case scenario where the industry does not recover but the company reaches breakeven, the stock could be worth its book value of approximately $5.95—around its current share price. In a base case where the industry experiences a slight turnaround, achieving EBIT of $7-10 million could imply a valuation of $6.60 to $9.00 per share, representing a 10-50% upside. The best-case scenario, where the industry rebounds and CULP can generate $15 million in EBIT due to operational efficiencies, could yield a remarkable 120% upside.
Culp, Inc. (CULP) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 5 hedge fund portfolios held CULP at the end of the second quarter which was 5 in the previous quarter. While we acknowledge the risk and potential of CULP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CULP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.