BLOUNT INTL INC BLT
April 12, 2010 - 7:55pm EST by
ecf191
2010 2011
Price: 10.75 EPS $0.60 $0.75
Shares Out. (in M): 48 P/E 17.9x 14.3x
Market Cap (in $M): 520 P/FCF 10.7x 11.4x
Net Debt (in $M): 230 EBIT 70 75
TEV ($): 750 TEV/EBIT 10.7x 10.0x

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Description

Blount International is an overlooked gem of a small-cap industrial trading at less than 8.0x normalized pre-tax un-leveraged earnings and 11x free cash flow, which we think is due to lack of Wall Street coverage and a technical overhang from a major shareholder.  We think this is a cheap price for a company with strong EBIT margins (~15%), good pre-tax ROIC (north of 35%), consistent (and strong) free cash flow generation and a decent outlook for growth.

BUSINESS:

  • Blount manufactures and markets cutting chain, guide bars, sprockets and accessories for chainsaw use, concrete cutting equipment and accessories, and lawnmower blades. 
  • The industry structure is an oligopoly with BLT enjoying the number one market share with a 50-60% market share worldwide in cutting chain and guidebars and Stihl running a close second. 
  • Approximately 20% of the company's sales are to chainsaw manufacturers and about 80% of sales are for replacement chains and guidebars for existing chainsaws; in general, professional loggers need to replace their chains every 5-10 days. 
  • BLT has broad geographic diversification with almost 70% of sale outside the United States. 
  • Importantly, the number of chainsaws worldwide continues to grow each year and historically the company has enjoyed good pricing power given it's strong market share and brand names.  So, we think the outlook for both units and pricing are solid for this business over time.

DISLOCATION: Recently, there has been some dislocation in BLT's shareholder base.  Lehman Brothers, which as you probably know is in bankruptcy, owned approximately 8.9mm shares (or ~18% of BLT) in a old merchant banking partnership.  Lehman recently sold over 4mm shares in a private placement to a number of accounts through Barclays, which we believe is more related to the Lehman bankruptcy and age of the investment in the merchant banking partnership than due to company fundamentals.  The remaining 4.7mm shares may very well be for sale and seems to be creating an overhang on the stock, which we believe is a short-term issue that is largely technical.

NEW MANAGEMENT:  Also noteworthy is that a new CEO was recently appointed after the existing CEO decided to retire.  The new CEO is Josh Collins, who previously worked at Lehman Brothers and has a long history with the company.  Josh seems very focused on shareholder value and will likely make some bolt-on acquisition with the BLT's free cash flow.  Given his deal-making background, I doubt that he would hesitate to sell the company if a strategic buyer was to offer a fancy price.  In the meantime, we think that he has laid out earnings estimates that he can meet or exceed this year with very easy comps in the first-half of 2010.

VALUATION: We think that BLT's normalized EBITDA is $115mm, which is about $15mm higher than management guidance for 2010 but $5mm less than BLT's 2009 second-half run rate of about $120mm (the business is not that seasonal).  We think that maint capex is $20mm (management says it's $15mm), so we think that EBITDA - capex is around $95-100mm.   With a TEV of $750, the business is trading for less than 8x our normalized pre-tax earnings.  We think the company is worth at least 10x pretax earnings or around $16/share today and could be worth around $20/share in a couple years with some reasonably good operating performance and capital allocation.  At $10.75, we think this entry point offers a reasonable margin of safety.

 

We own a position in BLT and reserve the right to change our opinion and position in the company without updating the market to that effect.

 

 

Catalyst

Lehman overhang gets cleaned up

Guidance seems conservative to us

Little Wall Street coverage

 

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    Description

    Blount International is an overlooked gem of a small-cap industrial trading at less than 8.0x normalized pre-tax un-leveraged earnings and 11x free cash flow, which we think is due to lack of Wall Street coverage and a technical overhang from a major shareholder.  We think this is a cheap price for a company with strong EBIT margins (~15%), good pre-tax ROIC (north of 35%), consistent (and strong) free cash flow generation and a decent outlook for growth.

    BUSINESS:

    DISLOCATION: Recently, there has been some dislocation in BLT's shareholder base.  Lehman Brothers, which as you probably know is in bankruptcy, owned approximately 8.9mm shares (or ~18% of BLT) in a old merchant banking partnership.  Lehman recently sold over 4mm shares in a private placement to a number of accounts through Barclays, which we believe is more related to the Lehman bankruptcy and age of the investment in the merchant banking partnership than due to company fundamentals.  The remaining 4.7mm shares may very well be for sale and seems to be creating an overhang on the stock, which we believe is a short-term issue that is largely technical.

    NEW MANAGEMENT:  Also noteworthy is that a new CEO was recently appointed after the existing CEO decided to retire.  The new CEO is Josh Collins, who previously worked at Lehman Brothers and has a long history with the company.  Josh seems very focused on shareholder value and will likely make some bolt-on acquisition with the BLT's free cash flow.  Given his deal-making background, I doubt that he would hesitate to sell the company if a strategic buyer was to offer a fancy price.  In the meantime, we think that he has laid out earnings estimates that he can meet or exceed this year with very easy comps in the first-half of 2010.

    VALUATION: We think that BLT's normalized EBITDA is $115mm, which is about $15mm higher than management guidance for 2010 but $5mm less than BLT's 2009 second-half run rate of about $120mm (the business is not that seasonal).  We think that maint capex is $20mm (management says it's $15mm), so we think that EBITDA - capex is around $95-100mm.   With a TEV of $750, the business is trading for less than 8x our normalized pre-tax earnings.  We think the company is worth at least 10x pretax earnings or around $16/share today and could be worth around $20/share in a couple years with some reasonably good operating performance and capital allocation.  At $10.75, we think this entry point offers a reasonable margin of safety.

     

    We own a position in BLT and reserve the right to change our opinion and position in the company without updating the market to that effect.

     

     

    Catalyst

    Lehman overhang gets cleaned up

    Guidance seems conservative to us

    Little Wall Street coverage

     

    Messages


    SubjectQuestions
    Entry04/14/2010 10:08 AM
    Memberbentley883

    Ecf

    I found your write-up on BLT interesting, as the company has some characteristics that many value investors may find appealing. I do however have a couple of questions to help flush out the investment thesis:

    1) The biggest issue for me concerns the shares valuation. Like many value investors I like to look at the cash yield the company is returning on a potential investment to see if the valuation is attractive. Based on your guidance for normalized EBITDA of $115 million (what period would this be?), I come up with the company generating FCF of about $50 million (is that consistent with your modeling?) in the future. On that calculation, the company's FCF/EV yield appears to be close to 6.7%. That appears to be a pretty average return. Any thoughts?

    2) You indicate that at current prices the shares offer a reasonable margin of safety. Can you please expand on this to show what metrics you are using?

    3) The company has a fair amount of debt. Why? Are there any plans to use the cash flows in the business to pay this down?

    4) Can you speak to the issue of the share dislocation, as a look at the stock chart shows the shares have been in a healthy uptrend over the last year without any significant pullback? It does not look like the additional supply had any real negative impact on the stock price.

    5) Can you discussed the issues that caused the shares to trade down to the $4 level about a year ago and what has helped changed investment sentiment to account for the health rise in the share price over the last year?

    6) Can you speak to the issue of the recent stock sales by James Osterman?

    Thanks

    Bentley


    Subject3/10Q earnings
    Entry05/11/2010 11:29 AM
    Memberecf191
    • BLT posted strong earnings in the 3/10Q and raised operating income and free cash flow guidance for 2010. 
    • In addition, the company laid out it's growth plans over the next five years.  Although I am generally skeptical of long-term growth plans from management teams, I believe the plans from BLT management are reasonable.  From internally generated funds, the management team thinks they can double EBDIT to $180mm in the next five years from additional capital projects and tuck in acquisitions; with a current quarterly run rate of $112mm, the target doesn't seem like a stretch. 
    • The company is also looking to refi it's capital structure in August when they can call the senior sub notes at par and will likely do the whole thing with bank debt and lower their cost of debt capital.
    Today, you are paying about $530mm for the equity - - I think in three years they can do $140mm of EBITDA less $20mm for capex and $20mm for interest for about $100mm pre-tax.  So, the stock is trading at about 5x pretax earning in three years.  Given sector multiples, I think it can trade at least 10x pre-tax earnings or a double from here in three years.
     
     

    Subject35% ROIC, growing business at 5.5x pretax earnings
    Entry08/11/2010 01:40 PM
    Memberecf191
    On 8/9/10, Blount posted strong earnings for the 6/10Q and raised guidance for EBIT to around $90mm for 2010 - -  EBITA is about $97mm (which includes about a $6-7mm hit in 2010 from currency) - - call it roughly $100mm of EBITA for the core business in 2010.  We expect this will grow in the years to come.
     
    Also on 8/9/10, Blount announced that it had refinanced it's debt, which extended maturity and lowered its cost of capital; the company now has $350mm of gross debt that costs less than $20mm per year.
     
    On 8/10/10, Blount announced a highly accretive acquisition - the company paid $90mm for trailing EBITA of $12.5mm or about 7.2x and used cash on the balance sheet to buy it; proforma for the acquisition, cash is around $50mm.
     
    Take the $100mm of EBITA core + $12.5mm from the acquisition is say $115 of proforma EBITA in round numbers if you look 12 months ahead less $20mm of interest expense is $95mm pretax.
     
    The equity cap of the company is $520mm - so it's 5.5x pretax earnings.  Even if you give them no credit for the cheap debt and look at it unleveraged, it would be $520 equity cap + $300mm of net debt is $820 divided by 115 is only 7.1x unleveraged pretax earnings.
     
    This company could easily be LBO'd for 10x - - which would be ~$18/share.

    Subjectnew high; +40% fr re-activate idea; only 11x FCF
    Entry11/01/2010 05:21 PM
    Memberecf191
    BLT earnings are out Wednesday and should be strong; at only 11 or 12x free cash flow, the stock still has room to run...combined with UFS reactivate idea (+50%-plus this year), anyone feel like voting for reactivating my account?
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