Description

Synposis

We believe Société BIC (BB.FP or Bic) is a timely short idea following the stock’s 20%+ rebound in late 2018 to the €90 range after what had been a near 3+ year continuous decline from €150 to €75. Why the Q4 pop? A one-quarter reversal of the slowing/negative top-line growth trend (some of which is channel restocking related and much of which seems to have come at the expense of margins) and the fact that Bic has probably been a beneficiary of investor rotation into staples/defensives during a period of extreme market volatility. We think the long-term growth trend for the business remains irreversibly negative and the Q4 bounce provides an attractive opportunity to short a company that we view as being amongst the most secularly challenged of any consumer name we follow. We see EPS as likely trending down to the €4-4.50 range over the next 2-3 years (vs. €6 in 2017 and expectations of €5.50 this year) – at SMID-cap CPG multiples of 14-15x, Bic would have 30% type downside; at EPC’s 11x multiple (a similarly challenged business), there would be 50% downside. Even if it were to ever rerate higher to mega-cap CPG multiples of 18-20x, we think Bic could still end up having 10%+ downside. The risk/reward of the short in the high €80s range looks reasonably good to us as a result.

Bic has not been written up on VIC before as far as we can tell, but our short thesis here is straight-forward so we will keep this write-up brief

Overview

Bic is a French-listed, family-run, global manufacturer of disposable lighters, shavers/razors, and stationary products (pens, pencils, markers, etc.). It is a strong global brand with a diversified geographic presence, albeit mostly focused in the US (~40% of sales), W. Europe (~30% of sales), and Brazil. Bic has some other EM exposure (notably India via its acquisition of Cello pens) but it is limited and our diligence suggests the company is too far behind now and does not have the financial resources to withstand the initial losses necessary to compete in the highest growth markets.

2017 segment details: (1) lighters comprised 35% of revenues but 70% of EBIT (~40% margins); (2) shavers/razors were 22% of revenue and 15% of EBIT (13% margins); (3) stationary/writing instruments was 40% of revenue and 17% of EBIT (8-9% margins). There is a small “other” category comprised of non-core legacy businesses that are being sold-off (sporting goods, etc.). Margins and growth have generally been trending down in every category, but shaving has been hit the hardest, which probably won’t shock anyone reading this. What might surprise you more is that the disposable lighters business has consistently been a 35-40% operating margin business historically and has become the primary remaining profit pool.  

While we generally like owner-operated businesses (the Bic family controls a 44% economic interest and 60% voting interest), we think analysts are largely underestimating the earnings pressure Bic will come under as the growth slowdown extends and the family/management takes a long-term view of the reinvestment needs for the business (marketing, distribution, etc.) in an attempt to stabilize the terminal value. These investments are probably the right long-term business decision for company but the Street appears to be overly optimistic in terms of what that likely translates to in terms of FCF/earnings. Furthermore, our view is that many of these initiatives are now table-stakes to compete as a global CPG and Bic is really just trying to catch up after a long period of underinvestment – at best, we think these might let them run in place for a little while longer.

Key Thesis Points

1.      Every one of Bic’s key products has competitive and/or secular risks

Shaving: A deep dive on trends in this category have been well covered in the Edgewell (EPC) posts on VIC – we’d encourage you to read them for more context if needed. At a high level, our view is that the bloodbath that has already occurred in the US men’s systems market following P&G’s price cuts is likely to roll through other markets next where Bic is more exposed (disposables, women’s razors, and Europe). Bic is the #3 global player in the wet shave market, but is different from Gillette/Schick in that its business has been primarily focused on disposable razors, not systems. But as Gillette/Schick have been forced to find ways to generate profits across their entire shaving portfolio, they have relaunched more price competitive branded disposable products and, in EPC’s case, increased private label focus which is probably the bigger threat to Bic’s position. They’ve also reduced the pricing umbrella between systems and disposables and are spending more on retail support/promotion. As a result, we think Bic is at risk of getting squeezed at the high and low-end and risks losing critical shelf-space at retail. At the same time, Harry’s has started to make inroads into retail stores, Amazon has recently jumped into the private-label razor business with its Solimo line, and Harry’s/DSC have started to go after the European DTC market and women’s razor markets. All of this adds up to more competition, lower margins, and more marketing / channel support for less growth in the US/Europe for Bic

Disposable Lighters: This segment is the key for how much we get paid. Our diligence suggests this is a better business that we would have guessed initially - Bic has dominant share in many of the developed markets (60%+), a scale and efficient global manufacturing operation, and some protection from competition by safety regulations in the US/EU and the low product price points, all of which helps support the very high EBIT margins in this segment. That said, smoking rates in developed markets have been in multi-year decline and the growth in e-cigarettes presents a new existential risk to the entire tobacco category. Ex-China (which is now 40% of global cigarette volumes and where Bic has almost no presence), cigarette consumption was down 3% in 2017, the 5th consecutive year of decline. Bic has managed reasonably well through that backdrop in recent years, with growth in LatAm and some pricing/mix benefits (Bic has emphasized decorated sleeves, i.e. lighters with images/designs, like sports team logos, sold at a price premium) helping to offset those declines until recently. We believe the growth and margin pressure seen more recently is likely related to the explosive growth in e-cigarettes, which are still <5% of total category sales but have been growing at near asymptotic rates. You will likely have read about Altria’s investment in JUUL which is the leader in this growth area and we think is indicative of how seriously the major tobacco players are taking this existential risk. As it specifically relates to Bic, we suspect the recent significant margin erosion relates to in-store promotional support for the products (we’ve heard some C-stores are moving disposable lighters away from the prime in-store real estate they currently occupy next to the register in favor of e-cigarettes). We are skeptical this segment will fall off a cliff like razors might but we could reasonably foresee a more flattish future growth profile with further margin erosion, which Street/consensus does not contemplate

Stationary/Writing Instruments: The shift to paperless/digital presents an ongoing, long-tailed structural challenge to this segment but the more immediate challenges are around competition and promotional support. We’ve heard NWL has been stepping up support of its brands which probably creates some pressure for Bic to do the same. There are also some channel shift dynamics (with more sales moving online) that could result in Bic losing some market share given how much more fragmented the online market is vs. in-store retail. In general, we think this segment will likely end up with modest growth (in part due to its presence in India and Brazil) and flattish margins as well going forward and isn’t enough to move the needle one way or another.

Segment Growth Trends

Segment Margin Trends

2.      Bic is “growth trapped” in that it’s overexposed to slower-growth developed markets and likely too late to compete in the highest growth EMs

3.      Street estimates are too optimistic in assuming a return to growth / margin stability. We think 2019/2020 numbers could end up coming down a lot

4.      Given this is a family business run with a conservative balance sheet, we think there is a reasonable chance the company cuts its dividend and or slows/stops buybacks rather than fund them via debt while this reinvestment period occurs

5.      At a higher level, we think the entire branded CPG sector has multiple rerating risk given what we see as structural challenges to future growth and margins

Risks:

1.   The lighters business may end up being more resilient than we expect, which limits the absolute downside given its outsized % of Bic’s remaining profit pool

2.   Bic will likely remain FCF generative with a clean balance sheet BS (gives it more runway to stabilize things and limits the absolute downside that sometimes occurs in the highly leveraged, roll-up type consumer names)

3.   Given its business and geographic diversity, we have had less luck tracking/forecasting trends in the very near-term (Nielsen/IRI data helps but Bic has more FX and inventory restocking/destocking quarterly noise than most consumer names)

Valuation

As referenced in the synopsis, Bic’s SMID-cap US and European CPG peers trade at mid-teens type EPS multiples and 9-10x EBITDA on average (we’d include names like EPC, NWL, ENR, ESSITY, SPB, ONTEX in this group) vs. the mega-cap CPG names at 18-20x EPS and 13-15x EBITDA. If we were to include the tobacco names (which have derated significantly in recent months), we end up somewhere in the SMID-cap CPG multiple range again. We think Bic should probably trade at a discount to its SMID-cap peers and that EPC is its closest analog – this would suggest a price target in the €50-60 range, or 30%+ type downside on our numbers.

Catalyst

-         Q4 guidance/estimates are at heightened risk of a miss given the material implied revenue acceleration

-         We also think initial 2019 full year guidance could disappoint

*** (Bic is scheduled to report Q4 / full-year results on Feb. 13th)