|Shares Out. (in M):||50||P/E||0.0x||0.0x|
|Market Cap (in $M):||695||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
Blount represents an attractive long at $13.89 with upside potential of roughly 45% to fair value of $20.
Blount’s business is comprised of the following segments:
FLAG (Forestry, Lawn, and Garden) represents 70% of total sales. This is their core saw chain and guide bar business. It’s essentially a duopoly with Stihl so pricing is rational and it has been a 20%+ EBITDA margin business for the past 10 years except 2008/2009 where margins dipped into the high-teens. Their customer mix here is 60% pro loggers and 40% consumer. Demand is driven by wear and tear/replacement. Geographically it breaks up as roughly 30% NA, 35% Europe, 35% rest of world.
FRAG (Farm, Ranch, and Agriculture) represents 28% of total sales: This a collection of businesses BLT has acquired over the past two years. 65% of this segment is Woods/Tisco which makes attachments (think mowers, backhoes, etc) and replacement parts for agricultural equipment. The other 35% is SpeeCo which makes log splitters and replacement tractor parts. Demand is tied to farming activity (literally activity/usage, not farmer income). 90% of this segment’s revenues come from North America.
CCF (Concrete Cutting and Finishing) represents 2% of sales: Too small to talk about but its saw chain that can cut through basically anything.
Blount has been left in the dust among a peer group that has been on fire over the past 18 months due to macro pressure in Europe, the drought of 2012 impacting farming activity, and acquisition integration issues. Not only that, but in February they announced their largest customer, Husqvarna, was going to produce its own saw chain starting in 2015…..what else could go wrong???
The answer is not much.......and the reasons to own Blount from here are:
1)Business in Europe appears to be bottoming
2)A rebound in US housing starts from the current 900k-1M run rate to a more normalized 1.4-1.5M will be a boon to their North American business
3)The 2012 drought hurt FRAG, not only has this created an easy comp but 2013 looks great on an absolute basis
4)To date management has botched the integration of its FRAG segment acquisitions and as a result it is under-earning in a big way right now.
5)FCF is temporarily being depressed by higher than normal capex spend
A note on Husqvarna
On February 13th BLT declined almost 18% on the news that their largest customer, Husqvarna, would be building their own saw chain capacity starting in 2015. They represent 8% (roughly $80M) of total company sales. While this is definitely bad news the reaction is way overdone and the situation is manageable. Here are some details around the relationship:
A negative, but I peg the impact to 2015 at $20M if they get 20M feet of capacity online, that will represent a 2% headwind and BLT have a year and a half to align their capacity appropriately so utilization/margins don’t get whacked.
|Market Cap||$13.89 X 50m shares||$695|
|Cash EPS||$ 1.41||$ 1.20||$ 1.45||$ 1.67||$ 1.81|
|Per Share||$ 0.92||$ 0.63||$ 1.05||$ 1.46||$ 1.61|
BLT doesn’t scream cheap at first glance, but as highlighted above, they are currently coming out of a tough 18 month stretch and sales/profitability are troughing. I believe my numbers are conservative and can get close to $2.00 in earning power a few years out once they find their stride and start using the FCF to pay down debt. Its tough to find a pure comp for BLT, but I’d look to TTC/SMG/Husqvarna and 12x the out year earnings number looks reasonable, this brings me to a $20 target.
|Entry||05/23/2013 04:25 PM|
Any thoughts on the recent intrest show by that PE firm - the name of the firm escapes me now. This was an LBO many years ago. Thanks for the posting, do you think any other competitors decide to get into the business?
Thanks for the post.
|Subject||RE: PE Interest|
|Entry||05/23/2013 05:31 PM|
It was originally spun from Lehman's merchant bank in 2004. No particular thoughts on P2 Capital, they have been invovled since Q3 2011, I have heard second hand that they would prefer the investment to work out passively but may get more aggressive if it really falls out of bed.
In terms of competitors, their major competitor right now is Stihl. The two of them have 90%+ market share in the developed world and slightly less in emerging markets (the Chinese do make a product, although apparently injuries are common and you learn your lesson quickly...). Between Stihl and Husqvarna they control 75-80% of the Chainsaw OEM market, so I'm not sure another company would be large enough to enter or feel like competiting against the dominant market players.
I think a lot of rationale behind Husqvarna building out their own capacity is they no longer want to rely on BLT as their only source for saw chain, so I'm not taking it as an indicator that there will be more competitors jumping into the industry. But hey, when money is free......
|Subject||Margin expansion potential|
|Entry||05/29/2013 06:05 PM|
Nice writeup. A few questions on margins
A) You talk about a material margin opportunity in FRAG, and model in EBITDA going from 3.5% in '12A to 12.9% in '15%. Did you get that by explicitly baking in cost savings and applying an incremental margin to the $30mm of sales lift ($280mm - $250mm) in the period? Wasn't clear given you said management guided to 15% margins on $300mm business - how much would that extra $20mm of sales ($300mm - $280mm) add to EBITDA - maybe $8mm? In that case they'd have $44mm EBITDA ($36mm you had + $8mm) on $300mm of sales or 14.6% margin which is still below the guidance.
B) Is there a margin opportunity of any sort in FLAG beyond operating leverage? Taking your '15E EBITDA relative to '12A, I calculate a 28% incremental EBITDA margin, which seems reasonable for a business if it is mostly variable cost .. what is the mix of fixed/variable cost
C) What are pricing trends? Just trying to get a sense for how much of the revenue pickup is units vs price, where the latter really helps margins. You'd think that in a oligopoloy they should be able to push 2-3% price annually with little pushback
|Subject||RE: Margin expansion potential|
|Entry||06/01/2013 12:07 PM|
Thanks for the questions gary, apologies for the late response
1) I think we are on the same page here. I agree with your math. But to be conservative, and because management has dropped the ball thus far, I’m not baking in full credit for their targets. I hope to be pleasantly surprised. Given the margin structure of the businesses when they were acquired 15% is by no means heroic and I bet they could do a bit better.
2) I don’t have a definitive answer for you on the exact cost structure, will come back to you on it. I will say that the business has run at gross margins as high as 36-37% and 33-34% seems to be the norm going back a decade or so. While they don’t break out GM for FLAG, it is likely running close to the 31% it was at in 2011 due to negative mix shift away from saw chain in Europe (that is the highest margin product).
3) Pricing trends have been as follows (note this is price/mix, but you’ll get the idea):
Q1 13 -0.4% (it was noted on the call this was mostly mix)
Hope that helps
|Subject||RE: HUSQB new facility|
|Entry||07/08/2013 05:12 PM|
For full disclosure, I have not been able to get anyone at Husqvarna to talk to me on the specifics of their capacity expansion. So I'm relying on my conversations with BLT mgmt to make my assumptions, not sure if you have met them in the past, but we've been following the stock since 2009 and have found them to be honest and straightforward guys.
One small note, when they say a "foot" of capacity, they mean a foot of saw chain not a square foot.
These are the details I have:
-HUSQB has not broken out the $150M spend into saw chain and cylinders
-they buy roughly 38M feet from BLT right now
-from conversations w/HUSQB this is their take on the situation: they plan to have 15-20M feet of capacity by 2015 (although BLT believes this may be tough to accomplish), they plan to only build pro grade chain no consumer stuff (pro is about 60% of the mix)
-they believe that even at 20M feet of capacity the chain will be relatively high cost, so pricing aggressively in the aftermarket will be difficult
Since BLT is HUSQB's only source for chain it is probably in their best interest to keep them relatively honestly informed for the time being, so I believe mgmt's comments can be taken with more than a grain of salt. If something goes wrong on their end they can't really go running over to Stihl.
I thought this comment on the HUSQV Feburary call was instructive (bold is mine):
And then when it comes to [indiscernible] (32:33) the reaction will be from – yes, it's – in this market, there are mainly two who have 90% of the production of these chains for chainsaws worldwide. And today, there is not enough capacity. That's the reason why we want a full control over this very important component for the chainsaws by ourselves in-house here. And of course, we're able to increase our margin here. Will there be some reactions from our other suppliers when it comes to this, I doubt that. Most likely not, but that's something I can't comment which reaction that will be. Of course, we have informed yesterday the sale of the supplier of the chainsaws here. And we have good relationship with them, and we will have that even in the future, we source some other components from them as well.
As for the production cost, since BLT is so much further along the efficiency curve it would be tough to extrapolate that to a company starting from scratch.
|Subject||anyone still following?|
|Entry||08/05/2015 02:42 PM|
wondering if we are near a bottom given capitulation today on earnings.. any thoughts?