Description
Jarden (JAH)
Intro
Jarden is the manufacturer of household staples and sporting goods brands such as Sunbeam, Oster, Mr. Coffee, Bicycle cards, Mapa Spontex, Coleman, Marmot, Rawlings, and K2. Its brands are typically #1 or #2 in niche spaces (i.e. Bicycle playing cards, Marker ski bindings, and Yankee candles). It sells through a variety of distribution channels - primarily large retailers such as Walmart, but also drugstores, groceries, sporting goods, specialty retailers, and its own DTC channels. The company was substantially formed in 2002 when it acquired Tilia International, the owner of the Foodsaver brand.
I like it because it trades at an inexpensive valuation, the recent Yankee Candle acquisition has upside, management is shareholder friendly, and the story is poorly understood due to light (but increasing) sellside coverage.
The stock trades at 13x 2014 EPS, a discount relative to the mid-cap consumer brands space average of 17x despite having a faster earnings growth profile and more shareholder friendly management. I expect a 2013-15E EPS CAGR of 21% including buybacks versus the industry average of 9.1%. Part of the reason that Jarden has traded at a depressed multiple is because its ROIC is low at 8.2%, but with improving margins, low capex requirements, and working capital savings, ROIC should improve over time. The company is only 11 years old, so its age is also an artificial impediment on ROIC.
Sales Growth
The company’s long term financial goals are 3-5% organic sales growth and segment earnings margin expansion to 13.5%. In the near term, the company will deliver growth at the high end of its target, as its Consumer Solutions segment has been growing at 7%+ in recent quarters and does not face tough comps until Q2 2014. 85% of the company’s revenue is from North American and Europe, so increasing emerging market penetration represents an attractive growth opportunity. When expanding into new markets, Jarden can leverage its scale to accelerate sales growth. For example, the company has found success in having a single salesforce attack South America. Leveraging its scale across one salesforce means that the company can sell Oster home appliances, Coleman sporting goods products, and Spontex cleaning products to retailers in the same transaction.
M&A
The company does M&A very well and the evidence points to value creation for each of its acquisitions. For example, the company formed its Consumer Solutions segment from the acquisition of Tilia / Villaware, Sunbeam Products, and Holmes for a total EBITDA at time of acquisition of $171mm. By 2009, the segment was generating $280mm in EBITDA, up 64%. More recently, the company acquired Yankee Candle, a manufacturer of premium scented candles for $1.8bn (8x EBITDA) in September 2013. Yankee has historically has delivered 7% sales growth at 20% EBIT margins, both above legacy Jarden, which should drive continued revenue growth and margin expansion.
Upside from the Yankee deal is likely more than the market gives credit for. The old Yankee has developed a very loyal customer base – women between 25 and 45 who religiously buy $25+ candles every month for new fragrances. The company says synergies will be 1-3% of sales but will mostly be reinvested in the business. These reinvestments should fuel top line growth and margin enhancements as there appears to be much room to grow. All of Yankee’s candles are manufactured in the northeast US, even the products that are shipping abroad. There is currently no distribution to Walmart and little distribution in Europe ex UK, which is the market with the second highest per capital candle spend in the world (after the US). The business is under-penetrated in the West Coast. All of these opportunities represent upside that neither management nor the sellside have quantified.
Capital Return
The company is well aware of capital return priorities in the absence of attractive M&A. In January 2012 the company executed a modified Dutch tender offer, buying back 17% of its float. In February 2013 the company increased its share repurchase authorization to $500mm. CEO Jim Lillie has indicated he expects to be able to resume repurchases in FY2014 as the bank leverage ratio returns to its target of 3x. Outside of share repurchase, the company is active in managing its debt, refinancing expensive senior debt in March 2013 and issuing convertible notes with low probability of conversion in June 2013.
Management
Martin Franklin is the company’s founder and adventurous Chairman. He is an ultra-marathoner and has personal SPACs outside of Jarden which some argue dilute his focus on the company. Nevertheless, the company has realized tangible benefits from his personal connections and deal-making abilities. Jarden does not participate in auction processes. The company does not pay investment banking advisory fees. The Yankee Candle deal illustrates Martin’s value-add as a dealmaker, where Martin heard the asset was available after it failed a sponsor auction process by Madison Dearborn. Jarden was also able to avoid obtaining a financing guarantee at time of deal as a prerequisite for the transaction, which helped expedite the process.
Jim Lillie is the CEO and capable executer. He is a former effective KKR operator, having served as Executive VP of operations at Moore Corporation, EVP of Operations at Walter Industries, and senior positions at World Color, all while they were KKR portfolio companies. His background as a private equity portfolio company operator is well-suited to Jarden’s M&A model.
Valuation
Assuming the company maintains this target and either executes M&A in excess of a buyback or buys back stock to maintain its 3x leverage ratio, it is not hard to get $5.30 in EPS in 2015. Valued at the current trading multiple of 13x forward the stock could go to $69 within a year in the base case. It is possible that the multiple could expand as the “roll up discount” goes away and investors get more familiar with the story. (This occurred with Danaher, where the discount has become a premium – the company’s multiple has expanded to as investors have appreciated the value of the “Danaher business system.”) At the sector average P/E of 17x, the stock is worth $74 on 2015 earnings.
Pro forma for Yankee, the company should generate $400-500 of free cash flow this year. With low capex requirements (2% of sales) most of the EBITDA growth should translate into free cash flow growth as well. The stock currently has an attractive FCF yield of 8.4% on 2014 estimates and 10% on 2015 estimates.
There is very limited downside to owning Jarden. Risks include a general consumer macro slowdown, trade issues with Walmart (which accounts for 19% of sales), M&A misstep, or the sudden death of Martin Franklin. This is a stock that promises safe, steady growth and margin expansion over time rather than rapid short term share price gains.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Catalysts
The next big catalyst is the announcement of FY2013 and Q4 earnings, in which the company will announce its next 3-5 year plan. An aggressive EPS target would boost the stock, but I expect the company to guide conservatively in a manner consistent with its historical goals. Another catalyst could be another medium-size acquisition in 2014, as the company has left itself some firepower (half a turn of EBITDA or $500-600mm) by financing Yankee with debt and equity. In the absence of M&A, the company has indicated it will return to buybacks once it reaches it bank leverage target of 3x EBITDA which should provide ample support for the stock.