Hamilton Beach Brands (HBB): A Simple Business and a Super Cheap Stock Facing a Tough Cash Situation in 2020
Hamilton Beach Brands (HBB) looks like a cheap stock. As I write this, the stock is trading at $8.71 a share. The company – or, at least the continuing part of the company now that Kitchen Collection is gone – earned anywhere from $1.50 to $2.00 a share over the last 3 years. That puts the P/E ratio at something like 4-6. Other ways to look at the stock include pricing it off of its EBIT or free cash flow. Over the last 5 years, the continuing portion of the company reported EBIT of between $33 million and $41 million. The company’s enterprise value is about $186 million (just take the market cap and add about $55 million in debt). So, that gives us an EV/EBIT ratio of anywhere from 5 to 6 times. Again, not expensive. A “normal” EV/EBIT ratio given today’s tax rates would probably be about 12 times. Free cash flow has averaged just under $30 million a year over the last 3 years. That gives you an EV/FCF ratio of about 6. All of these point to the stock being pretty cheap. The company also has a plan to one day achieve revenues of between $750 million and $1 billion and EBIT margins of 9-10%. It’s a long-term plan. But, a company that hit even the bottom end of that range could be worth closer to $800 million than the less than $200 million enterprise value at which Hamilton Beach Brands now sits.
The cheapness of Hamilton Beach Brands stock is the good news here. There is some bad news. And I’ll start with the news that concerns me the most – the balance sheet. On the one hand, Hamilton Beach has a solid balance sheet. Current assets exceed total liabilities. That’s usually a great sign. The company is always solidly EBIT profitable. However, it isn’t always very solidly cash flow positive. If we look at the make-up of Hamilton Beach’s balance sheet we can see why. At present, 38% of HBB’s assets are held in the form of receivables. 36% of assets are held in the form of inventory. Less than 1% of assets are in the form of cash. The company’s undrawn portion of its credit line is only about 20% of its total balance sheet as it stands now. In fact, the amount HBB can draw on that line is less than 50% of either its receivables or its inventory. Furthermore, HBB is a seasonal company. It does things like selling its receivables off and drawing on its credit line in a normal year. Normally, HBB builds up inventory during the first half of the year. Things turn around starting in the fall. And then the cash comes flowing in as we go through the holiday season. Will that happen this year? Hamilton Beach has already promised it will. The company had – as of December 31st, 2019 – promised to buy $210 million worth of inventory this year. That’s against just a couple million in cash on hand. So, drawing on that credit line and selling those receivables and all of that is what this company would have to do even without coronavirus.
What exactly are these inventories Hamilton Beach will be buying? Hamilton Beach is a designer and marketer – but not a manufacturer – of small kitchen appliances (and irons). The company’s Hamilton Beach brand sells more units of small appliances than anyone else. Major customers are Wal-Mart at 33% of sales and Amazon at 14% of sales. Products sold are things like: air fryers, blenders, breadmakers, coffee grinders, coffee makers, griddles, espresso makers, food processors, jar openers, juicers, meat grinders, popcorn makers, rice cookers, tea makers, toasters, vacuum sealers, and waffle irons. These things tend to be bought as gifts around Christmas. Almost everything is sourced from China where it is manufactured to HBB’s specifications. And almost everything is then sold in the U.S. HBB is in a few other countries. But, it’s not a big part of the business. So, the business is really the design and marketing of small kitchen appliances manufactured in China and sold in the U.S. About half of the business is just with Wal-Mart and Amazon. Fully one-third of the business is just with Wal-Mart. The company has other brands. And it does sell to some professionals. Some products are used in restaurants, hotels, fast food joints, etc. But, most aren’t. This stuff is mostly on Wal-Mart shelves, at Amazon, etc. And it’s sold to U.S. households – often, but not always – for gifting.
It’s hard to evaluate the risks here in 2020. We did see a big decline in demand in 2008 and 2009. Consumer confidence is very important to Hamilton Beach’s results. But, overall this is neither a growing nor shrinking industry. The amount of units sold over time probably does grow. But, the prices of these products have probably not kept pace with inflation. Sales were up about 3% in 2018 and then down about 3% in 2019. Tariffs probably caused the decline in 2019. The business is seasonal. But, it’s not fully seasonal. And the products being sold are fully discretionary. You can certainly defer the purchase of an air fryer or an espresso maker or a toaster. So, a lot of foot traffic at Wal-Mart or a lot of eyeballs on Amazon pages won’t necessarily translate into a lot of sales of small household appliances.
Can the company survive this period and get to the Christmas season intact? Unlike a lot of companies – Hamilton Beach hasn’t yet announced anything about coronavirus. It hasn’t said how it’s affecting its business. So, we don’t know what the company is doing about increasing its liquidity. HBB sells receivables all the time. The 10-K makes it sound like HBB sells these receivables to the same financial institution each year. So, it probably has a relationship that makes turning receivables into cash easy. HBB’s receivables are mostly – but not completely – good as gold. The company’s two biggest customers – Wal-Mart and Amazon – aren’t credit risks. Other receivables could be from department stores (which are a bit riskier), dollar stores (though they’ve mostly discontinued this business), and maybe an occasional Costco or something similar. It shouldn’t be hard to turn receivables into cash at some discount. Inventory is a bit more of a problem. E-Commerce sales for HBB grew more than 25% last year. The company would probably – if 2020 was a normal year – be getting close to one-third of sales from online. Maybe it would only be a quarter. But, we shouldn’t assume offline sales are more than 80% of HBB’s total sales. So, they could move inventory through online channels. But, again – these are purchases that can be deferred. If consumers aren’t feeling confident, they may buy fewer blenders (even online). If they buy fewer blenders, then HBB’s inventory will turn more slowly. It won’t become cash as fast as the company needs it to. And the company has purchase obligations to buy a lot of stuff this year. Can it get out of those? HBB doesn’t use long-term contracts on either the buy side or sell side of its business. It says that many of its manufacturers in China have been producing for HBB for a long time. But, it only has one supplier that accounts for more than 10% of HBB’s purchases. The company has 63 suppliers in China. They may work with HBB. But, it’s unclear that they are all totally dependent on HBB and would rather keep a good relationship with HBB than have cash instead. Also, unless there’s an organized way of doing it – no one would want to be the company that allows its orders to be canceled when other suppliers eventually get paid cash for theirs. I don’t know how stressed the suppliers will be – but, like everyone else, they’re unlikely to be in a mood to do anything that reduces the amount of cash flowing to them this year. So, there should be ways to work around these problems. But, they could be really tough for HBB. I think the balance sheet and the traditional ratios we’d look at might understate how much of a problem 2020 could be for HBB. Receivables and inventories aren’t cash. The company has debt. It doesn’t have a lot more credit to draw. It doesn’t have cash. And it does have purchase obligations. I don’t consider its financial position here to be rock solid.
What if it gets through 2020 just fine? Well, even if HBB gets through any cash crunch – this could be a rough Christmas. We don’t know if that will be the case. But, it could look like 2008-2009. That’s not devastating for HBB. The company could easily see a decline in profit – but, it’d be a lot tougher to see an actual loss. Other than liquidity issues – this is normally a pretty resilient company. It is a cyclical business. But, you saw how stable EBIT is in relatively non-cyclical years like 2015-2019: $33 million, $41 million, $39 million, $38 million, and $37 million. This is a predictable business. It should have earning power restored to it a couple years out. So, it needs to get through the current cash crunch. It needs to face a year or two of lower (but still positive) earnings. And then it’ll be back on track.
Can investors afford to wait that long?
At today’s prices – probably. If you buy a stock at a P/E of 8 or less, you won’t be ruined by a couple years of nearly no profits as long as you’re back to making more than a 12.5% earnings yield a couple years down the road. By all measures, HBB is probably selling at a meaningful discount to like 8 times earnings. It could – especially on a leveraged basis – be selling at more like a P/E of 4. You could see a big recovery in this stock after a few years. It spun-off from NACCO (NC) at about $32 a share. Now, it quickly declined from there. And it’s been declining pretty steadily ever since that spin-off. It spent a lot of time around $20 or so. In theory, we’re talking about a stock that – if it recovers to where it traded in the past – could be worth 3-4 times today’s price.
I don’t love HBB as a business. The company makes it clear barriers to entry are low in the industry. It competes against private label brands at its own customer’s stores (like Wal-Mart). I don’t think the industry has been able to increase prices on small households appliances for much of the last couple decades. And I’m sure that the customer base is getting more and more consolidated. Pretty soon this company could be selling two-thirds of its product through Wal-Mart and Amazon. Also, some major customers have looked into sourcing products directly from Asia. The companies that make small kitchen appliances for HBB have learned how to do it. The customers HBB supplies know there are manufacturers in China who could make stuff. So, eventual competition from branded competition from Chinese companies that entered the industry as mere suppliers is a risk. It’s also a pretty no growth business in the U.S. HBB has a strong market position. Sales, EBIT, etc. don’t vary much from year to year. And the stock is very cheap compared to what it’s likely to be earning year after year just a couple years down the road.
This is a tough one. But, it’s not an industry I love. I think there is some financial risk here in 2020. And it’s not like you are passing up on a lot of future growth by skipping HBB and finding something that can reinvest its earnings and grow more over time. So, that’s probably what I’ll do.
HBB isn’t a growth stock. It is a value stock though. It’s normally a reliable earner. But, it may not be that safe this year. It is – however – undeniably cheap.
Geoff’s Initial Interest: 40%
Geoff’s Re-visit Price: Already cheap