unearthing value at nacco industries feb 2011
TRANSCRIPT
Unearthing Value At NACCO IndustriesFebruary 21, 2011
ryan
@th
ekno
wledge
pile.c
om2
Company History and Overview
Originally founded in 1913, NACCO is named after its original business line, North American Coal.
Beginning in the mid 1980’s, NACCO began to diversify away from its core business by acquiring disparate companies including Eaton’s Yale Materials Handling Unit, WearEver-Proctor Silex, The Kitchen Collection and The Hystercompany . NACCO eventually merged with Hamilton–Beach Brands in 1990.
While NACCO has since divested a few non-core assets, today it remains an conglomerate comprised of four unrelated businesses. Consequently, the market has a difficult time properly valuing the company and its shares trade a steep discount to estimated intrinsic value.
NACCO Industries is a diversified industrial holding company with operations in four main business segments: lift trucks, mining, small appliances, and specialty retailing.
ryan
@th
ekno
wledge
pile.c
om3
NACCO Industries Investment Thesis
Odd collection of good businesses with market leading positions but few if any synergies
CoalFork LiftsHousewares and specialty retailing
Minimal sell-side research coverageOnly one analyst covering the stock
Cheap valuation on a consolidated basis
Significantly undervalued on a sum-of-the-parts basis
Spin-off or sale of non-core businesses a potential catalyst for share price appreciation
Ticker: “NC”Stock Price: $125.57
Recent Valuation Multiples:
7.76x ‘11E Earnings (ex-cash)*5.82x EV / 2011E EBITDA
Capitalization:Equity Market Value: $1,046mmEnterprise Value: $1,230 mm
*Note: cash adjusted to include $60mm payout from Harbinger lawsuit settlement announced 2/17/11
ryan
@th
ekno
wledge
pile.c
om4
More About NACCO’s Four Businesses
ryan
@th
ekno
wledge
pile.c
om5
NACCO’s Four Businesses
NC operates in four business segments
Materials Handling Group
Manufactures, sells, services and leases fork lift trucks under the Hyster and Yale brands
~56% of Revenues
~2.5% Operating Margins
Hamilton Beach Brands
Designs, distributes and markets small electric household appliances under the Hamilton Beach and Proctor Silex brands
~20% of Revenues
~7.5% Operating Margins
~17% of Revenues
~10% Operating Margins
North American Coal
Mines and markets coal primarily for fuel for power generation
Specialty retailer of kitchenware and gourmet foods under the Kitchen Collection and Le Gourmet Chef store names
~7% of Revenues
~3% Operating Margins
Kitchen Collection
ryan
@th
ekno
wledge
pile.c
om6
Materials Handling Group Overview (“MHG”)
NMHG designs, engineers, manufactures, sells, services and leases a comprehensive line of lift trucks and aftermarket parts marketed globally under the Hyster and Yale brands
#3 manufacturer of fork lifts behind Toyota and Linde20% market share in US, 8% globally
Very cyclical business which should benefit from economic upswing
Strong backlog indicates positive growth and demand
Excellent distribution channels and seller network
Potential acquisition target for financial buyer or competitor
ryan
@th
ekno
wledge
pile.c
om7
Materials Handling Group Financial Snapshot
MHG Income Statement MHG Balance Sheet MHG Cash Flow (in $mm's) (in $mm's) (in $mm's)
TTM 2009 2009Revenue 1475.2 Assets 290.8 Operating Cash Flow 115.9Operating Loss (EBIT) -31.2 Cash 163.2 Free Cash Flow 110.1Net Income -43.1 LT Debt 246.4
Margin Analysis
EBIT Margin -2.11%Net Income Margin -2.92%
Despite generating an operating loss in 2009, NACCO’s Materials Handling Group generated positive free cash flow during the same period. Given its high operating leveraged and uptick in reported revenues which are tracking +14% and +35% YoY for Q3 and Q4 2010, the business is on pace to earn an operating profit and return to profitability for FY 2010.
Source: NC company presentation and 10-K
ryan
@th
ekno
wledge
pile.c
om8
North American Coal Overview (“NAC”)
NAC mines and markets coal primarily as fuel for power generation and provides selected value-added mining services for other natural resources companies. Thecompany operates five surface coal mining operations and has three additional coal mines under development
#1 coal Lignite coal producer in the United States with operations mainly in North Dakota, Texas and Mississippi; amongst top 10 coal producers overall
Lignite coal is a low ranking coal type used as fuel in steam-electric power generation
Not subject to price fluctuationsThe company mines under “cost-plus” contracts with local power plant customers under which they are essentially guaranteed a fee for service regardless of the direction of coal prices
2.2MM tons of proven reserves, of which 1.2MM are committed to customers through long-term contracts expiring as far out as 2045
Original business line of company
ryan
@th
ekno
wledge
pile.c
om9
North American Coal Financial Snapshot
NACCO’s North American Coal segment earns predictable, stable and recurring free cash flow without the exposure to commodity price fluctuations typical of coal and other commodity producers, resulting in a high-quality, annuity-like business
NAC Income Statement NAC Balance Sheet NAC Cash Flow (in $mm's) (in $mm's) (in $mm's)
TTM 2009 2009Revenue 213.9 Assets 172.1 Operating Cash Flow 42Operating Loss (EBIT) 6.7 Cash 1.6 Free Cash Flow 31.5Net Income 3.9 LT Debt 46.8
Margin Analysis
EBIT Margin 3.13%Net Income Margin 1.82%
Source: NC company presentation and 10-K
ryan
@th
ekno
wledge
pile.c
om10
Hamilton Beach Brands Overview (“HBB”)
Hamilton Beach is a leading designer, marketer and distributor of small electric household appliances, as well as commercial products for restaurants, bars and hotels
Manufactures blenders, can openers, coffeemakers, food processors, indoor grills, irons, mixers, slow cookers, toasters, etc.
Operates under well known Proctor Silex and Hamilton Beach brands
Has excellent relationships with leading retailers including Wal-Mart, Target, K-Mart and Sears
Potential acquisition target for a number of strategic and financial buyers
ryan
@th
ekno
wledge
pile.c
om11
Hamilton Beach Brands Financial Snapshot
NACCO’s Hamilton Beach Brands segment earns attractive EBIT and net income margins while generating free cash flow well in excess of its reported GAAP earnings
HBB Income Statement HBB Balance Sheet HBB Cash Flow (in $mm's) (in $mm's) (in $mm's)
TTM 2009 2009Revenue 497 Assets 217.8 Operating Cash Flow 35.5Operating Profit (EBIT) 50.4 Cash 34.1 Free Cash Flow 33.4Net Income 26.1 LT Debt 116.3
Margin Analysis
EBIT Margin 10.14%Net Income Margin 5.25%
Source: NC company presentation and 10-K
ryan
@th
ekno
wledge
pile.c
om12
Kitchen Collection Overview (“KC”)
Kitchen Collection is a national specialty retailer of kitchenware and gourmet foods operating under the Kitchen Collection and Le Gourmet Chef store names in outlet and traditional malls throughout the United States
Leading specialty retailer of kitchen products
Very low margin business that requires scale and retailing expertise in order to succeed
Low to no earnings over last few years
Could be run more profitability in by a full-fledged retailer such as Bed, Bath & Beyond or Macy’s
Sale to well-capitalized strategic buyer would generate cash that could be better deployed elsewhere as well as a tax asset as purchase price would likely be below cost basis for the business
ryan
@th
ekno
wledge
pile.c
om13
Kitchen Collection Financial Snapshot
NACCO’s Kitchen Collection carries a net cash position but earns fairly low EBIT and net income margins. A strategic acquirer could likely expand margins and would also gain a new outlet channel through which it could offload excess inventory without tarnishing the parent company brand.
KC Income Statement KC Balance Sheet KC Cash Flow (in $mm's) (in $mm's) (in $mm's)
TTM 2009 2009Revenue 213.9 Assets 81.9 Operating Cash Flow 5.4Operating Profit (EBIT) 6.7 Cash 8.5 Free Cash Flow 4.4Net Income 3.9 LT Debt -
Margin Analysis
EBIT Margin 3.13%Net Income Margin 1.82%
Source: NC company presentation and 10-K
ryan
@th
ekno
wledge
pile.c
om14
A Closer Look At NACCO’s Structure
ryan
@th
ekno
wledge
pile.c
om15
Why Are These Businesses Together?
NACCO’s legacy conglomerate structure is the byproduct of an earlier time during which arrangements of this nature were in vogue and quite popular. Today, however, the merits of such structures are in question.
In recent years, many conglomerate business have simplified their operations by spinning off or selling their non-core businesses and have been rewarded favorably by shareholders for doing so.
NACCO’s four businesses have no apparent synergies
NACCO is one of the last types of these businesses remaining
ryan
@th
ekno
wledge
pile.c
om16
Why A Breakup Of NACCO Makes Sense
In early April 2007, NACCO Industries announced it would spin-off its Hamilton Beach Brands segment citing the transaction as an “opportunity for significant value enhancement for ours shareholders” and its stock soon reached all time highs. By the summer of 2007, however, the plan was shelved due to the uncertainty and volatility in the capital markets.
Recent announcements by Fortune Brands, ITT Corp., Marathon Oil, and Williams Companies amongst others to breakup their business and the subsequent share price appreciation achieved as a result are likely to cause NC management to revisit their own spin-off plans.
Illogical structure and complicated consolidated financials statements creates difficulty for investors to determine the fair value of the business
Breaking up into four distinct units with alleviate this difficulty by allowing the market to value each segment more easily thereby highlighting the intrinsic value of the business and unlocking significant value for shareholders
Create four standalone, pure-play businesses that would make attractive acquisition targets for strategic or financial buyers, further driving share price appreciation
Give shareholders a choice of whether to own the fork lift business, the coal business, the housewares businesses, the specialty retail business or all four
ryan
@th
ekno
wledge
pile.c
om17
Shareholder Friendly Management, Corporate Governance and Financial Reporting
NACCO Industries has a unique and open corporate structure which is somewhat atypical for holding company/conglomerate businesses
NACCO provides very transparent financial statements and thorough historical supplemental data
Each segment reports full financial statements allowing for detailed analysis
Supplemental segment data allows for even deeper fundamental work
Each business segment has its own board of directors
Each business is treated as a stand alone entity with no interference from the parent company, much like the way operating businesses are treated at Berkshire Hathaway
Each of these attributes make a separation of NACCO’s four businesses even easier
ryan
@th
ekno
wledge
pile.c
om18
So, What Is It Worth?
ryan
@th
ekno
wledge
pile.c
om19
Materials Handling Group Peer Analysis
Note: Data based on 2/18/11 closing prices and fx rates
Source: Bloomberg
Toyota Linde AG Cascade Corp MedianMarket Cap (mm) $161,188 $26,127 $544 $26,127Enterprise Value $270,647 $35,005 $574 $35,005
EV / 2011E EBITDA 14.00 8.26 7.78 8.26
ryan
@th
ekno
wledge
pile.c
om20
North American Coal Peer Analysis
Note: Data based on 2/18/11 closing prices
Source: Bloomberg
Peabody Energy Massey Energy Co. Arch Coal, Inc. MedianMarket Cap (mm) $17,532 $6,565 $5,368 $6,565Enterprise Value $19,295 $7,207 $7,124 $7,207
EV / 2011E EBITDA 10.90 7.40 6.85 7.40
ryan
@th
ekno
wledge
pile.c
om21
Hamilton Beach Brands Peer Analysis
Note: Data based on 2/18/11 closing prices
Source: Bloomberg
Newell Rubbermaid Tupperware Jarden MedianMarket Cap (mm) $5,866 $3,485 $3,321 $3,485Enterprise Value $8,099 $3,665 $5,866 $5,866
EV / 2011E EBITDA 8.29 8.21 7.28 8.21
ryan
@th
ekno
wledge
pile.c
om22
Kitchen Collection Peer Analysis
Note: Data based on 2/18/11 closing prices
Source: Bloomberg
Bed Bath & Beyond Macy's MedianMarket Cap (mm) $1,295 $1,006 $1,151Enterprise Value $1,151 $1,693 $1,422
EV / 2011E EBITDA 7.80 5.46 6.63
ryan
@th
ekno
wledge
pile.c
om23
Sum-Of-The-Parts Analysis
(1) Source: BB&T estimates
(2) Housewares includes Hamilton Beach and Kitchen Collection segments
(3) NC currently has ~$180mm of net debt but based on its cash flow generating ability should have no net debt by year end 2011
Analysis suggests that at NACCO shares are currently undervalued by 37-57%.
Another way to look at it is at current levels you are essentially buying NACCO’s fork lift and coal business at a reasonable price and getting its Hamilton Beach and Kitchen Collection
businesses for free.
(data in $mm's)
Segment 2011E EBITDA(1)Low
Multiple EVHigh
Multiple EVNMHG 98 7x 686 8x 784Housewares(2) 64 7x 448 8x 512Coal 49 6x 294 7x 343
Plus: Net Debt(3) - -
Equity Value 1428 1639Shares outstanding 8.3 8.3Implied price 172.0 197.5
Current Price: $125.57% Upside 37% 57%
ryan
@th
ekno
wledge
pile.c
om24
The Potential For Shareholder Activism
NACCO Industries is majority controlled by the founding Taplin/Rankin families via a dual class share structure, making (on the surface) a potential activist campaign to effectuate a breakup unlikely to yield much success.
However, company management has run the businesses in a shareholder friendly way for many years, making it more likely that a large shareholder with a well reasoned plan may be able to convince controlling interests of the merits of a breakup.
As the discrepancy between intrinsic value and market price grows and transactions of this nature become more frequent, it seems logical that a management team oriented towards maximizing shareholder value would dust off its spin-off plans and reconsider breaking up the business into its four respective parts.
ryan
@th
ekno
wledge
pile.c
om25
Recent Transactions Support Breakup Thesis
ryan
@th
ekno
wledge
pile.c
om26
Corporate Breakups Are Becoming Increasingly Common
In a “new normal”, low-growth environment where top-line growth is hard to come by, company managements are looking for new and creative ways to maximize and unlock shareholder value.
Over the past few months, several companies have announced plans split-up their businesses - separating units with different margin profiles, growth trajectories and earnings drivers.
ryan
@th
ekno
wledge
pile.c
om27
Case Study: Fortune Brands
On December 8th, 2010 Fortune Brands announced a plan for the separation of its three core businesses : distilled spirits, home and security, and golf products.
12/8: Fortune Brands announces separation of the company’s three businesses
10/8: Pershing Square discloses 11% stake 12/8: Fortune Brands
announces separation of the company’s three businesses
ryan
@th
ekno
wledge
pile.c
om28
Case Study: ITT Corporation
On January 12th, 2011 ITT Corp. announced a plan for the separation of its three core businesses: water, industrial, and defense.
12/8: ITT announces separation of the company’s three businesses
ryan
@th
ekno
wledge
pile.c
om29
Case Study: Marathon Oil
On January 13th, 2011 Marathon Oil. announced its intent to separate its high-multiple E&P business from its low multiple refinery business.
1/13: Marathon Oil announces plans to separate E&P and refinery businesses
ryan
@th
ekno
wledge
pile.c
om30
Case Study: Williams Companies
On February 17th, 2011 Williams Companies announced plans to separate its E&P business from its more steady cash-flow generating pipeline business.
2/17: Williams announces separation of E&P business from pipeline business
2/17: Williams announces separation of E&P business from pipeline business
ryan
@th
ekno
wledge
pile.c
om31
Conclusion
ryan
@th
ekno
wledge
pile.c
om32
Conclusion
Underfollowed conglomerate with four good but unrelated business lines
Attractive valuation on a consolidated basis
Trading at a significant discount to fair value on a sum-of-the-parts basis
Breakup opportunity presents catalyst to unlock value
Recent voluntary breakups at FO, ITT, MRO, and WMB serve as models for a potential transaction
Upside potential: 37-57%