The recreational vehicle (R/V) market was absolutely crushed during the recession of 2008 and 2009, as customers put off major discretionary items.

Coastal Distribution System (CRV), a part maker and distributor of over 12,000 RV and boating parts, supplies and accessories, was hit especially hard, with sales dropping more than 40% between 2006-2009.

Despite the company’s struggles, the industry appears to have hit rock bottom and the future outlook has started to show signs of improvement.

While CRV probably won’t see 2006 levels anytime soon, the stock should rally as the company and industry ‘revert back to the mean.’

Financials

2009 revenues were $103.2m, well off the peak of $179.1m in 2006. However, the company has managed to streamline operations during that time period.

In 2009, management’s cost cutting measures reduced SGA expenses by $8m, or 30.2%, over 2008.

Gross margins have remained steady throughout the downturn, around 18-19%, with a slight uptick as the company moves towards self-designed products (for the most recent quarter, approx. 33% of sales were from Coast’s own brand).

Both operating and net margins are extremely tight, averaging 2.6% and 0.9% over the past five years.

Quarterly Results

Through the first six months of the year, revenues were up an encouraging 4.3%, but with an even stronger improvement on the bottom line.

Operating income jumped 141.8% compared to the same period last year, as the company even managed to squeeze out a slight profit in the 1st quarter (usually the seasonal low period for R/V sales).

FCF so far in 2010 has been $1.2m, a big improvement over 2007-2009 (average of $0.43m), but still a ways off from 2003-2006 (average of $3.4m)

Industry Trends

As the chart shows, R/V sales took a dramatic dive during the recession to a low of 165.4k units in 2009, a level last seen in 1991.

However, after four consecutive annual declines, industry trends are starting to show significant improvement, with wholesale unit shipments up more than 71% YoY so far in 2010.

While this torrid growth will slow, the higher end of 2010 forecasts show total annual wholesale shipments of 238.2k, a 44% increase.

2011 estimates expect a further increase in wholesale shipments to 256.9k units, an 8.2% increase from the projected 2010 total.

While the increase is impressive, a portion can be attributed to dealer’s re-stocking their inventory after cutting back significantly during 2008 and 2009.

On the retail front, the latest surveys show that retail sales of motorhomes increased 8.8% in May 2010, with towable sales up 10% in the same period.

Although there is a lag in new purchases vs. the requirement to purchase parts, this data is welcome sign for CRV, as the company is well positioned to take advantage of these trends as sales improve (for another cyclical play, check out Vicon Industries – VII).

Demographic Trends

The U.S. population is positioned for a large increase in the number of baby boomers that will be nearing retirement, the prime age for R/V purchases.

According to the RVIA, in 2010, the number of consumers aged 50 to 64 will be 57m, 38% higher than 2000 – one-in-ten consumers within this age group own at least one R/V.

Other factors such as the potential for higher fuel costs and more weekend getaways will also help spur the demand for R/Vs, as studies have shown that traveling by R/V is significantly less expensive than other forms of travel.

Both of these factors will combine for increased R/V purchases and greater demand for the corresponding parts.

Risks

While management has done a good job of paying down debt and reducing operating costs, CRV’s long-term efficiency averages are less than ideal.

5 year averages:

• CROIC – 5.6%
• ROE – 5%
• ROA – 2.3%

Compare these numbers to Drew Industries (DW), the company’s closest competitor:

• CROIC – 12.6%
• ROE – 15.5%
• ROA –10.4%

CRV’s cash flow has also been inconsistent over the past decade, falling into a ‘boom-bust’ cycle every 3-4 years.

So despite the very positive macro-trends, management must still prove they can capitalize on the opportunity.

Despite these risks, the company appears to be cheap on several measures.

Valuation

The stock trades at less than half of book value and a 35% discount to NCAV – as a profitable company that is aggressively paying down debt and stockpiling cash, CRV appears to be undervalued at current levels.

Historically, the stock has traded with a P/B of 0.8 – applying this multiple to the current stock price, and the value would be $5.50, in-line with the above estimates.

Conclusion

Overall, Coastal Distribution System (CRV) is an interesting play on the strength and speed of the recovery in the R/V market.

According to the Recreation Vehicle Industry Association’s (RVIA), the summer/fall survey shows that:

“46 percent of RV owners are considering another purchase. Twenty-two percent said that they’re looking to buy in the next year, while 44 percent said within the next two years.”

Buoyed by strong demographic trends and a positive outlook for the industry, CRV has the potential to capitalize on this opportunity to grab market share and grow.

While I wouldn’t consider CRV for a long-term holding, the stock price should appreciate as the entire industry recovers, and could make for a strong investment, especially if the stock happens to fall under $3.

Disclosure

No positions.

iParty Corp. (IPT) operates 51 retail stores spread throughout New England and Florida. The company stocks over 20,000 products ranging from paper party goods and Halloween costumes to greeting cards and balloons.

The business is heavily dependent on holiday and party events like anniversaries and graduations, along with major holidays like Easter, Christmas, and Halloween.

Although the business is highly cyclical in nature during a given year, the company has been profitable for four out of the last 5 years (with the only hiccup being a loss in 2008 during the depths of the recession).

A string of recent insider buying and the upcoming Halloween season should help drive record profitability and free cash flow for this nano-cap stock.

Financials

Revenues have remained flat since 2006, falling into a range of $78-82M. Revenue increases are primarily driven from opening new stores – new store growth has slowed in the past few years as the company cut back during the recession.

5-yr median CROIC (11.4%) and ROE (5.1%) are unspectacular, but have risen substantially over the past several years. 2009 CROIC was 28.8% and it looks like 2010 will be in the same territory as well.

Debt to equity is high, at 148.4% in the most recent quarter – this number should come down after fourth quarter results. 2009’s debt to equity was 123.5%, down significantly from 243.9% in 2005.

IPT’s assets are tied up in inventory rather than cash or other liquid assets, and the company’s credit line is backed by this inventory. Hence, the quick ratio is very low, and the company’s Z-score could be improved.

While the balance sheet doesn’t compare to other stocks recently featured (JCTCF and APT for example), the company does have quite a bit of room left in its credit line, and has produced solid free cash flow each year since 2006.

On the income statement, management has done a great job of cutting costs so far in 2010 despite the flat sales. SGA expenses as a percentage of revenue was 36% in the second quarter of 2010, compared to an average of 45-50% in prior years.

Positives

Insider Buying

Five different insiders have been purchasing shares over the past year at prices ranging from $0.26-$0.30. In total, 346k shares were purchased, almost 1.5% of shares outstanding.

Several recent purchases in August and September should be a positive sign for the upcoming earnings release.

Increase in Comp Store Sales

After seven consecutive negative quarters for comp store sales, the company returned to growth for both the first (+1.3%) and second quarter (+1.4%) of 2010.

As a key metric for most retail businesses, this is a good sign going into IPT’s busiest time of the year, especially since 2009 was the best year in company history from both a net income and cash flow perspective.

Store Footprint

IPT opened its first city-based store in downtown Boston in December 2009. The company expects to open another store in a prime urban location before the 2010 Halloween season.

If management is correct, both should help drive increased exposure and sales for the fourth quarter.

In addition, the company has also increased its focus on temporary Halloween stores. It opened 4 temporary stores in 2009 compared to only 2 in 2008.

These temporary stores provide some flexibility to react to market trends, as the company can control its costs to some degree depending on the sales environment.

Negatives

Risk of Dilution

IPT currently has 5 different series of preferred shares, in addition to outstanding warrants for its common stock.

Combined, the preferred shares can be converted into approx. 15M shares of common stock, a significant number that could potentially lead to dilution for existing common shareholders.

The bulk of the warrants resulted from a 2006 financing agreement with Highbridge Capital – they carry an exercise price of $0.48/shr and currently expire in September 2011.

Cyclical Sales

IPT traditionally has reported a loss in its fiscal 1st quarter and 3rd quarter. The vast majority of profits come in the fourth quarter, with both the Halloween and Christmas holidays.

Other major events (such as the New England Patriots making it to the Super Bowl) can also have a dramatic effect on the company’s revenues. These fluctuations must be carefully managed and sometimes make investors nervous.

Although the company has done a great job in controlling SGA expenses, sales have stagnated around $78-80M.

There are only so many costs that can be wrung out of an organization, so top-line growth will have to come from somewhere (the urban-store expansion?) in order to propel the business further.

Valuation

Assuming the company ends the year with $0.05 EPS, that translates into a P/E ratio of 5.6 at current prices.  Applying a normal P/E multiple of 10 leads to a price of $0.50, in line with the other valuation methods.

Conclusion

This year is shaping up to a stellar year and insiders have been extremely bullish going into historically the best quarter for the company.

Management has done a good job of controlling costs throughout the economic downturn and has resumed their store expansion strategy which should help drive sales growth (while keeping some flexibility with the temporary store locations).

The company is backed by top venture capital firms.

Robert H. Lessin, now the Vice Chairman of Jefferies & Co, owns approx 35% of the company and appears to be a rockstar in the angel industry on the East Coast, providing seed investments to Overture and Register.com.

Other current holdings by Roccia Partners, Highbridge International, Boston Millenia Partners, and Patriot Capital all provide positive reinforcement that the industry believes in the company.

Finally, another catalyst happens to occur in October 2010 – this month has five full weekends (5 Fridays, 5 Saturdays, & 5 Sundays).

The last time this occurred in October was 2004. It won’t happen again until 2021, but for a company like iParty that depends on Halloween, it should provide opportunity for shoppers to hit the stores, translating into a nice sales boost!

I’m adding IPT to the Value Uncovered portfolio at yesterday’s closing price of $0.28.

Disclosure

Long IPT

As usual, here are a few value investing ideas from the past few weeks:

Mass Financial Corp (MFCAF.PK)

MFCAF is backed up the reclusive and somewhat oddball investor, Michael Smith, who has a record of growing shareholder value with obscure companies (Smith is also in charge of another recent value idea, KHDHF.PK, featured back in August).

MFCAF has grown book value at an incredible rate since its spin-off from KHD in 2006 – going from zero to $2.43 by the end of 2006, then to $4.39 in 2007 and $5.71 in 2008. As of December 2009, book value was at $9.72.

The company recent announced a one-for-one stock merger with TTT, another company chaired by Michael Smith. It is a complicated investment that deserves additional due diligence.

Reading International (RDI)

A good interview over at SeekingAlpha with Andrew Shapiro, founder of Lawndale Capital Management, on Reading International (RDI).

Reading International is an underfollowed company that owns movie theaters throughout Australia, New Zealand, and the US.

Unlike other theater operators, Reading usually owns the majority of its real estate properties. Reading has 16.5MM sq ft of real estate and only 1.2MM is currently developed, leaving 15.3MM sq ft available.

A big potential catalyst is Reading’s huge undeveloped parcel outside of Melbourne, Australia. At 51-acres, it is one of the last undeveloped parcels near the central business district and a potential sale should bring immediate windfalls to common shareholders.

A contrarian play with significant undervalued real estate holdings offers great potential for value investors (see my post on JCTCF for another example).

Premier Exhibitions (PRXI)

A stock that has been discussed frequently on twitter and beyond (as well as other value investors here and here), a judge recently ruled that PRXI legally owned the $110m in artifacts it recovered from the wreck of the Titanic.

With a market-cap of only $85m, the stock trades at a discount to the value of its assets. However, despite the possible value in liquidation, it looks like the company intends to display the artifacts (a money-losing business over the past several years).

In addition, some turmoil in the management ranks makes for some concern over the future of the company, but regardless, it is a play to certainly keep an eye on.

Sun Healthcare Group (SUNH)

Continuing the theme of potential value unlocked in real estate, ValueHuntr has another well put together presentation from a guest poster on Sun Healthcare Group (SUNH).

Sun Healthcare is a leading skilled-nursing services provider that is currently splitting into two business segments: the operating company and a REIT.

The industry looks attractive, as the elderly population continues to increase while the number of care facilities continues to decline.

In addition, SUNH benefits from substantial tax loss carryforwards, an experienced management team, and appears undervalued on a comparable and sum-of-parts basis.

Disclosure

No positions.