Yes indeed folks, there's hidden value at "the beach", but we're not talking about looking for buried treasure in the sand. We're talking about small appliance company Hamilton Beach. Part of Cleveland-based Nacco Industries (NYSE:NC), the small appliances division of the mini-conglomerate isn't doing too badly in 2009, considering we're still in the middle of a recession. Once things pick up, there's no reason why it shouldn't continue to benefit from owning one of the best-known consumer product brands in America. By the end of this article, it's my hope that you too will see the bargain currently available.
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A Mini Conglomerate
Nacco is a holding company with three operating segments: materials handling, housewares and North American coal. Hamilton Beach is one of two businesses in the housewares group; the other is Kitchen Collection, which operates 202 Kitchen Collection and 83 Le Gourmet Chef retail kitchenware stores in the U.S. Together, they are juxtaposed against a coal-mining subsidiary as well as a materials handling group that makes Hyster and Yale lift trucks. It's an odd combination that got its start in 1913 as the Cleveland and Western Coal company. The name changed to North American Coal in 1925, and was listed on the New York Stock Exchange in 1961. It acquired Yale and Hyster in 1985 and 1989, forming the backbone of the materials handling group. Lastly, Kitchen Collection was bought in 1988 and Hamilton Beach was picked up two years later, in 1990. What's been created is one of the most unique trios of businesses in America.
However, whether it'll make you any money is another story. (Learn more about conglomerates in Conglomerates: Cash Cows Or Corporate Chaos? and Conglomerates: Risky Proposition?)
The Disaster of 2008
It wasn't a good year for the holding company; it reported a net loss of $437.6 million on $3.68 billion in revenue. However, like many companies in 2008, it wrote off $435.7 million in non-cash charges for the impairment of goodwill and other intangible assets. Excluding these charges, it managed consolidated adjusted net profit of $23.8 million, or $2.87 a share. Revenues were up by 2.2% and adjusted net income down 73.7% from $90.4 million in 2007. From a profitability standpoint, that's its second-worst performance in the last 10 years. In 2009, business is down considerably, although margins are strengthening.
In its third quarter ended September 30, revenues were down 42% from $917.8 million to $532.6 million. On the bright side, gross margins improved 640 basis points year over year to 17.7%, and the company's operating profit jumped almost 200% from $3.1 million in Q3 2008 to $9.2 million this year. If not for the performance of the materials handling group, which is its biggest segment generating 66% of its total revenues, 2009 would have to be considered a success.
Where's the Value?
Lift trucks aren't selling. That's no surprise. Go look at Deere (NYSE:DE), Caterpillar (NYSE:CAT) and all the other construction equipment companies. Lower-than-normal rates of construction means there is dismal demand for equipment or replacement parts. It's continuing to restructure operations but the materials handling group will see a loss in 2009 compared to an adjusted profit of $1.1 million last year. This won't be solved in 2010. I'd guess they'd break even next year. Any growth in both profits and revenues will have to come from the two other divisions, and Hamilton Beach appears ready to be a heavy contributor.
In 2008, Hamilton Beach had an adjusted net profit of $7.4 million. So far, in the first nine-months of 2009, its net income is $13 million, up from $0.8 million in the same period last year. While revenues for the first nine months are down $21.9 million to $320.3 million, and they'll likely decline in the fourth quarter, profits still should be good. Since third-quarter revenues declined 14%, I'll use that for my Q4 projections. I see revenues in the fourth quarter of $160.4 million, which means $480.7 million for the entire year and with a 4.1% net margin, $19.7 million or $2.37 a share in net profits. That's considerably higher than the $7.4 million last year. Imagine what it'll do once the economy perks up.
Hamilton Beach and Competitors
|
Company
|
Price/Sales
|
Price/Book
|
Price/Cash Flow
|
|
Nacco Industries (Hamilton Beach)
|
0.2
|
1.3
|
4.2
|
|
Whirlpool (NYSE:WHR)
|
0.3
|
1.5
|
5.7
|
|
Jarden (NYSE:JAH)
|
0.5
|
1.5
|
4.4
|
|
Green Mountain Coffee Roasters (Nasdaq:GMCR)
|
3.7
|
4.4
|
62.1
|
|
National Presto Industries (NYSE:NPK)
|
1.3
|
2.1
|
11.7
|
Bottom Line
Add in the North American Coal business, which I estimate will deliver $26.1 million in revenue in the fourth quarter and $136.5 million for all of 2009, and you have a minimum of $4.17 a share in profits. That means the two businesses will make $6.54 a share in 2009. I'm assuming the materials handling group will lose approximately $6.75 a share and Kitchen Collection will breakeven. The value comes when you consider that three years down the road, the two companies making money today will be bringing in close to $8.70 a share (combined) and if the biggest division pulls itself out of its downturn, it too should produce $10.33 a share in profits three years hence for a consolidated profit of $19 a share. At today's prices, that's a forward price-to-earnings ratio of 3.6. It's a lot to ask, but it's more than possible.
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