I have been investing for a few years and think I am getting the hang of it.
Here's my story for CAV.
CAV sells carpets, from 2000 - 2010 it benefited from a low wool price and strong profit margins on its excellent wool carpet. It also owns a wool scour and buying business - it's vertically integrated.
2010-2015 things started turning to custard. In response to years of low prices sheep farmers shifted to meat and dairy, synthetic carpets improved in quality to be substitutable with wool damaging margins, the U.S. had a glut of carpet from the housing boom with a strong NZD making exports to NZ attractive, the NZ/AUD exchange rate was high and a shrimp disease killed demand for wool grease from the scour.
Profitability fell from 18m at the peak to just a few million and management were slow to respond.
The company has transitioned to synthetic, sold loss making operations and is back to a normalised profit of about 6m per year. In 2016 further restructuring for the new business environment is planned with job losses unfortunately.
The company now sells 150m of carpet per annum, 60% wool 40% synthetic and wool carpet has (hopefully) stabilised at 20% of the NZ and Australian markets.
I think post restructure in 2017 CAV can make a 4% margin on carpet sales or 6m per annum plus a 3m contribution from the scour. It should be valued at a PE of 15 or around $2 per share with a free option on improved profitability if a planned scour merger goes ahead - a little intelligent speculation on the side.
While the company has recovered from its low of 33c to 70c already I am happy to hold for some further gains until the sharemarket realises all is not lost and this company has a future.
That could take a few more years but hopefully not. I am not an advisor, just a private investor - do your own research.
Time will prove me right or wrong.
