Description
First of all, this is a Dutch company, trading in Amsterdam. There was no option for Netherlands, and since at one point Netherlands were part of the Spanish Empire, I chose Spain.
The stock price is in Euros, but the company reports in USD. All numbers that I quote are in USD.
Thesis:
I recommend the purchase of shares in HunterDouglas corporation. It is an excellent business that is family controlled and well managed, trading at a pro-forma P/E = 11x 2017 earnings assuming normalized margins for the Levelor acquisition and not taking into account earnings accretion from the latest British acquisition. This is way to cheap for a company that should benefit from continued strength in US housing market (NA sales = 50% of 2016 revenues), and hurricane driven rebuilding.
Description of the business
Manufacturer of blinds under Levelor and Hunter Douglas brand names. 50% of revenues come from North America, 35% from Europe. The rest is Asia and Latin America.
Financial results
The company reported USD 2.821bn in sales in 2016, and a 15.8% increase in revenues in USD in H1 2017 driven by 3.8% organic volume growth, 13.8% increase due to acquisitions and negative 1.2% currency impact.
Operating margin = 9.9% in 2016 or 11% excluding the loss making Levelor business that was acquired in 2016. Operating margins declined in H1 2017 from H1 2016 due to planned heavy investments in Levelor to significantly boost its sales.
Assuming that the company is able to get Levelor margins to company levels of 11% on an operating basis, and excluding the just acquired British business, the company should be able to do roughly $3.24bn in 2017 revenues and about USD 365MM in operating income on a pro-forma basis.
Given net debt of USD 480MM on 06/30/2017, the company should incur roughly USD 10MM of interest expense, again, excluding the July 17th British acquisition. Thus pro-forma pre-tax income = USD 355MM, using a 25% tax rate gives a net income = USD 266MM or USD 7.65 per share.
I am also assuming that the newly acquired British business is not going to be earnings dilutive in the long run, and given the level of interest rates it is hard to imagine it being so.
Net debt prior to British acquisition = USD 480MM versus pro-forma EBIT of USD 365MM and post British acquisition = USD 870MM, still under 2.4x EBIT.
Valuation
Given the pro-forma EPS of USD 7.65 per share, stock price = 70.38 E and Euro = 1.20, we are paying 11x pro-forma EPS. For a well-run, shareholder oriented business, facing significant positive tailwinds from US housing market, and very conservative capital structure, this seems way too cheap.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
None.