Huffy Corporation HUF
April 20, 2001 - 3:56pm EST by
2001 2002
Price: 7.80 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Huffy would like to peddle your kid's next bike. The company is best known for its all-purpose bikes, which are sold through national and regional chains. Huffy is the largest manufacturer of bikes in the U.S. with over 30% of the market. The company's Airborne, Huffy, and Royce Union bikes include kids' bikes and tricycles, comfort cruiser bikes, mountain bikes, and BMX racing bikes. However, to reduce its dependence on bikes, Huffy's Service First subsidiary provides at-home product repair and assembly services. The company also makes Buzz-brand electric scooters as well as basketball backboards (under an exclusive license with the NBA).

For the fiscal year ended 12/00, net sales rose 15% to $488.2 million. Net income from continuing operations and before extraordinary item totaled $10.7 million or $1.05/share, vs. a loss of $39.4 million. Net sales reflect increased demand for X-Games bicycles, Micro(R) scooters and merchandising services. Net income also reflects lower manufacturing reconfiguration charges.

Sales of wheeled products represented 70.1%, 62.6% and 64.2% of consolidated revenues of the Company during 2000, 1999 and 1998, respectively. Sales of portable basketball backboards, poles and goals represented 12.7% and 12.4% of consolidated revenues of the Company during 1999 and 1998, respectively. In-store assembly and repair services provided by Huffy Service First, Inc. to its customers represented 11.8%, 14.3% and 13.9% of consolidated revenues during 2000, 1999 and 1998, respectively.

Sales to two customers, Kmart and Wal-Mart, aggregated over 10% or more of the Company's consolidated revenues during 2000.

Why were they profitable in 2000 and not 1999?

A: In November of 1999 CEO Don Graber his management team helped turn the company around by selling Huffy's Washington Inventory Service subsidiary for a cash price of $84.75 million. The gain on the sale after taxes was $20.7 million or $2.01/share. The sale achieved multiple goals:

1. It allowed Huffy to focus more on the three related, synergistic businesses.

-Huffy Bicycle Company is the largest seller of bicycles in the world. As the industry leader, Huffy Bicycles stands for family fun, and delivers product innovation to consumers of all ages.

-Huffy Service First is the nation's largest and only nationwide supplier of retail services, including in-store and in-home product assembly and repair, and merchandising services.

-Huffy Sports Company is the exclusive supplier of residential NBA licensed basketball back-boards in the world, along with other recognized brands of residential and institutional basketball equipment.

2. Huffy strengthened the balance sheet by eliminating all the high interest term and subordinated term debt as well as pay-down on the revolver credit facility. Short and long term debt have decreased substantially from 1999. Debt to equity ratio is at 1:4. As a result, Huffy is better situated for more favorable financing arrangements.

B: Most important was management's implementation of its Continues Rapid Improvement (CRI) cost-reduction program in 1998 which cut costs all over. In accordance with this program, in 1999 Huffy incurred plant closure and manufacturing reconfiguration charges of roughly 38 million or $2.37/share. In 2000 these charges were $.05/share. This has been an ongoing plan to maximize operating efficiency by eliminated excess production capacity and operating expenses. These efforts have proved successful so far. Consolidated gross margins for 2000 have increased strongly to 16.6% from 8.7% in 1999 while Huffy Bicycle Company gross margins increased 17% from 1999. Selling, General ,and Administrative expenses fell 4.3% in 2000. Return on Equity has grown to 24.17% partly as a result of a $25 million reduction in annual fixed, operating and administrative costs. 1999 was a rebuilding year for Huffy. The company has transformed itself on the cost side and this clearly delivered enhanced results in 2000.

Why This is a Value Play:

A: Share Buyback Program: In 1998 and 1999 Huffy repurchased 3 million shares of stock for roughly $40 million. At that time the stock was trading in the teens. Its currently trading at $7.80.

B: During the reconfiguration Huffy stopped paying dividends to shareholders. Huffy was paying .34 cents per share yielding around 2 percent resulting in an increase in cash flow of $3 million per year.

C: The stock got hammered because of difficulties it faced during the reconfiguration. Now that things have turned around the stock has yet to follow.

Looking at the numbers...

-Huffy is trading at 7.4 times last years earnings. It has a book value of $7.20 per share and will produce significant cash going forward. Using a very conservative cash flow per share number of $2 per year for 10 years and a discount value of 15%, we get an intrinsic value of $10 per share. Also the fact that Huffy has been retaining its earnings lately adds even more value to the shares.
-With sales of nearly half a billion dollars and EBITDA of $32.6 million Huffy's market cap is only at $80 million.
-2001 will be a difficult situation because it has to compare against the very successful 2nd half of 2000 when the scooter craze took off. Despite this, management expects between 1.00 and 1.10 per share this year.


Huffy has experienced a classic turn around situation. This speaks a lot for management and CEO Don Graber. With significant cash flow going forward this company is trading well under its intrinsic value. As a result there is very limited downside risk and substantial upside potential. This coupled with the good management team in place makes a Huffy a very attractive acquisition. In fact, management hasn't been very bashful in indicating that it hired an investment bank, either for help in using their cash in making acquisitions or to be acquired.
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