Description
We wrote up Burnham Holdings, Inc. (BURCA) over five years ago.The investment has turned out well since then with a 39% appreciation in the shares and an annual 9.4% annual dividend yield based on beginning recommended share price. We thought it would be an excellent time to reevaluate the Company. The great news is that the shares still look significantly undervalued today. The business is doing well as the Company increases or maintains market shares in all its markets and is on the forefront of developing new products for the electric heating market. With a share price of $13 and $2.10 of expected earnings the company sells for 6.2 times 2024 earnings. In February the Company raised its dividend by 4.5% to $.92 per share giving the shares a current 7.1% dividend yield and demonstrating management's confidence in the Company's performance. In today's environment of plummeting yields, as the Fed is expected to cut yields at least 250 bps, this yield is extremely attractive and safe.
BURCA provides the HVAC (Heating, Ventilation and air conditioning) industry with thermal and interior comfort solutions for a wide range of residential, commercial and industrial applications. The Company is a market leader in the design, manufacture and sale of boilers, furnaces and related HVAC products and accessories. The products are energy efficient, sold under well-established brand names and manufactured in the U.S. The residential subsidiaries manufacture products for homes and small buildings under the U.S. Boiler Company, Velocity Boiler Company, New York Boiler Company and Governale brands. These residential subsidiaries offer a full range of hydronic heating products, including cast iron and stainless steel, steel boilers and cast iron and steel heat distribution products. Thermo Products, offers warm air furnaces for both heating and cooling markets, including specialized units for the manufactured home market.
The commercial subsidiaries, including Burnham Commercial, Bryan Steam and Thermal Solutions, provide heating applications for military bases, multi-unit residential, health care, government, education and hospital facilities. Industrial products include any project where steam or hot water is needed. The Company supplies a comprehensive list of supplies for these projects including cast iron, stainless steel, fire-tube, water-tube and copper-tube boilers, as well as boiler room accessories.
The Company's Thermal InMotion subsidiary compliments the manufacturing operations by providing a complete suite of boiler, rental, service and installation services.
To make its operations more efficient the Company strives for vertical integration of its operations. Casting Solutions annually converts tens of thousands of tons of scrap metal into boiler castings and other gray and ductile castings. Painted light-gauge metal parts are made by Company subsidiaries. Collectively the Company's subsidiaries offer more types and models of products and accessory equipment than any of its competitors.
Performance:
2023 vs 2022
Net Sales increased 5.2% to $253 million.
Gross profit was $59.8 million, and increase of $13.6 million! or 29.5%
Gross margin increased to 23.6% from 19.2%
SG&A was 19% of sales versus 17.1% last year.
Net cash provided by operating activities was $21.1 million versus $1.5 million last year.
Total debt was reduced by $6.3 million to $27.3 million.
Net Income was $9.4 million versus $5.4 million the prior year.
2023 was an excellent year for the Company. Over the year, the staffing shortages, inflation pressures, and supply chain disruptions, both internal and external, significantly improved. This resulted in increased production and sales. Commodity prices stabilized. Operational up time significantly improved driving significant increases in margins.
First Half 2024 vs First Half 2023
Sales were relatively flat at $111.4 million
Gross margins improved slightly to 23.0% from 22.9%
SG&A met expectations but were slightly higher than last year.
Net Income was $3.8 million vs. $4.0 million
EBITDA was $8.5 million or 7.8% of sales versus $8.9 million, or 7.9% sales, last year.
EPS were $0.81vs $.85 last year.
Residential sales were down 9% but commercial sales were up 23.3%
Market shares across all subsidiaries remained strong,
The Company believes order patterns and current backlogs are back in line with traditional seasonal cycles.
Average debt levels of the Company's revolving debt facility for the second quarter were about $6.4 million lower than second quarter 2023.
All in all, BURCA's performance continues to be solid and 2024 performance should be in line with last year.
Valuation
Given the essential nature of the industry that the Company operates in, its valuation remains extremely attractive. With EPS expected in the ball park of $2.10 per share, the stock sells for slightly above six time earnings. With a tangible book value of $22.36 the shares sell for less than 60% of book. And while you wait for a better valuation you collect a solid, safe dividend of over 7%. Applying a very reasonable 10X earnings to a more conservative earning result of $2 gives us a value of $20 which is 67% above its current share price. We don't see these super bargains in the larger cap markets.
Concerns;
1) The stock trades in the OTC bulletin board, which means liquidity is not great. But, as for disclosure it is quite good and comparable to a listed company.
2) Management and 5% holders hold close to 40% of the shares. This can certainly be a positive, but it does limit the voice of external shareholder.
3) Conversion to electric heating may limit the demand for steam and hot water boilers, but the Company is well ahead of this trend
constantly introducing new products that meet customer needs.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
1) The market finally recognizes the value inherit in the shares.
2) The rise in the dividend demonstrates managemt's confidence in the Company.
3) The high dividend yield attracts those losing the 5% rates of money markets.
4) The Company is a prime candidate to be taken private, given it solid cash flow.