BLOUNT INTL INC BLT
May 22, 2013 - 7:41pm EST by
ril1212
2013 2014
Price: 13.89 EPS $0.00 $0.00
Shares Out. (in M): 50 P/E 0.0x 0.0x
Market Cap (in M): 695 P/FCF 0.0x 0.0x
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT 0.0x 0.0x

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  • Duopoly
  • Agriculture
  • cyclical value
  • Customer Concentration
 

Description

Blount represents an attractive long at $13.89 with upside potential of roughly 45% to fair value of $20.

 

The Business

 

Blount’s business is comprised of the following segments:

 

FLAG (Forestry, Lawn, and Garden) represents 70% of total sales.  This is their core saw chain and guide bar business.  It’s essentially a duopoly with Stihl so pricing is rational and it has been a 20%+ EBITDA margin business for the past 10 years except 2008/2009 where margins dipped into the high-teens.  Their customer mix here is 60% pro loggers and 40% consumer.  Demand is driven by wear and tear/replacement.  Geographically it breaks up as roughly 30% NA, 35% Europe, 35% rest of world.

 

FRAG (Farm, Ranch, and Agriculture) represents 28% of total sales:  This a collection of businesses BLT has acquired over the past two years.  65% of this segment is Woods/Tisco which makes attachments (think mowers, backhoes, etc) and replacement parts for agricultural equipment.  The other 35% is SpeeCo which makes log splitters and replacement tractor parts.   Demand is tied to farming activity (literally activity/usage, not farmer income).  90% of this segment’s revenues come from North America.

 

CCF (Concrete Cutting and Finishing) represents 2% of sales: Too small to talk about but its saw chain that can cut through basically anything.

 

Thesis

 

Blount has been left in the dust among a peer group that has been on fire over the past 18 months due to macro pressure in Europe, the drought of 2012 impacting farming activity, and acquisition integration issues.  Not only that, but in February they announced their largest customer, Husqvarna, was going to produce its own saw chain starting in 2015…..what else could go wrong???

 

The answer is not much.......and the reasons to own Blount from here are:

 

1)Business in Europe appears to be bottoming

  • Their direct to end user business was up 10% in Q1, while there is always a 3-4 month lag management feels this is a leading indicator for their distributors needing to restock inventories
  • In 2012 Europe was (11.8%) organically, in Q1 2013 it was (5.5%).  Again, this is a relatively steady replacement business, the dealer channel can only let its inventory get so low….

 

2)A rebound in US housing starts from the current 900k-1M run rate to a more normalized 1.4-1.5M will be a boon to their North American business

  • Pretty self-explanatory, more starts = more lumber = more logging = more saw chain

 

3)The 2012 drought hurt FRAG, not only has this created an easy comp but 2013 looks great on an absolute basis

  • Last year the drought hit yields hard, this meant farmers logged less hours on their tractors and burned through less replacement parts.  The wet and prolonged spring of 2013 has also had a negative impact (a $5M push, as stated on the conference call, this is material for a $60-65M/qtr business)
  • However, due to the high grain prices the drought created the USDA is projecting a record planting of 174.4M acres of corn and soybeans.  This will be a big tailwind, especially later in the year.

 

4)To date management has botched the integration of its FRAG segment acquisitions and as a result it is under-earning in a big way right now.  

  • TTM EBITDA margins are roughly 4%, for perspective this is what the businesses looked like when acquired
    • SpeeCo, July 2010—TTM revenues of $77M, EBITDA of $12.5M (16.2% margin)
    • Woods/TISCO, September 2011—TTM revenues $164M, EBITDA $20.3 (12.4% margin)
    • The real culprit was SpeeCo, in 2011/12 they had major issues integrating it into their Kansas City plant which resulted in both incremental spending and lost orders.  They also faced a small product recall in Q4 2012. 
    • Management has guided to this being a $300M+ revenue business with 15% EBITDA margins within 2-3 years

 

5)FCF is temporarily being depressed by higher than normal capex spend            

  • Due the build out of their plant in Fuzhou, China, which started in late 2011 and spending on integration and facilities for the Woods/TISCO/SpeeCo acquisitions capex was elevated in 2012 at $50M.  It will come down to $45M in 2013 and management has stated that it will decline further in 2014.  They have pegged a normalized level at $30-35M ($20M maintenance + $10-15M growth)

 

A note on Husqvarna

 

On February 13th BLT declined almost 18% on the news that their largest customer, Husqvarna, would be building their own saw chain capacity starting in 2015.  They represent 8% (roughly $80M) of total company sales.  While this is definitely bad news the reaction is way overdone and the situation is manageable.  Here are some details around the relationship:

  • Of the $80M, only ½ the business is saw chain
  • BLT is currently Husqvarna’s sole supplier of saw chain.  They provide them with 38M feet of chain.  The mix is roughly 1/3 Original Equipment (OE) and 2/3 aftermarket.  This is important, because BLT already competes with Husqvarna in aftermarket, sounds dumb, but they sell them chain and then watch Husqvarna fight them with price at retail.  So really they will likely lose the $13M of OE business starting in 2015 and have to compete at retail (like they already are) for the other $37M
  • According to management you need 15-20M feet of capacity to scale and break even (so max of ½ the saw chain business with BLT currently), they believe it is going to be very tight to build that out within the next 18 months, and if they do get it done it will be high cost product, so their ability to come in and price aggressively seems limited

 

A negative, but I peg the impact to 2015 at $20M if they get 20M feet of capacity online, that will represent a 2% headwind and BLT have a year and a half to align their capacity appropriately so utilization/margins don’t get whacked.


Valuation


 

Market Cap $13.89 X 50m shares   $695  
Cash         $14  
Debt         $493  
Pension         $95  
EV         $1,269  
             
             
    2011 2012 2013 2014 2015
Revenue            
  FLAG 660 650 665 695 710
  FRAG 147 250 255 265 280
  CCF 24 26 26 26 26
  Total 831 926 946 986 1016
             
EBITDA            
  FLAG 140.2 134.5 138.3 146.0 151.2
  Margin 21.2% 20.7% 20.8% 21.0% 21.3%
  FRAG 14.4 8.8 20 29 36
  Margin 9.8% 3.5% 7.8% 10.9% 12.9%
  Corp -21 -19.5 -11 -11 -11
    133.9 124.0 147.6 164.3 176.6
             
D&A   35.7 45 45 45 45
Interest   18.7 17.3 18.5 17 16
Pre-Tax   79.5 61.7 84.1 102.3 115.6
Tax   29.8 23.2 31.5 38.4 43.3
NI   49.7 38.6 52.6 63.9 72.2
Stk Comp   4.4 5.5 5.5 5.5 5.5
Amort             
of intang.   15.8 15.9 15 15 15
             
S/O   49.4 49.9 50.3 50.7 51.2
             
Cash EPS    $       1.41  $       1.20  $       1.45  $       1.67  $        1.81
             
NI   49.7 38.6 52.6 63.9 72.2
D&A   35.7 45 45 45 45
CapEx   40 52 45 35 35
FCF   45.4 31.6 52.6 73.9 82.2
Per Share    $       0.92  $       0.63  $       1.05  $       1.46  $        1.61



BLT doesn’t scream cheap at first glance, but as highlighted above, they are currently coming out of a tough 18 month stretch and sales/profitability are troughing.  I believe my numbers are conservative and can get close to $2.00 in earning power a few years out once they find their stride and start using the FCF to pay down debt.  Its tough to find a pure comp for BLT, but I’d look to TTC/SMG/Husqvarna and 12x the out year earnings number looks reasonable, this brings me to a $20 target.

 


I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

 
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    Description

    Blount represents an attractive long at $13.89 with upside potential of roughly 45% to fair value of $20.

     

    The Business

     

    Blount’s business is comprised of the following segments:

     

    FLAG (Forestry, Lawn, and Garden) represents 70% of total sales.  This is their core saw chain and guide bar business.  It’s essentially a duopoly with Stihl so pricing is rational and it has been a 20%+ EBITDA margin business for the past 10 years except 2008/2009 where margins dipped into the high-teens.  Their customer mix here is 60% pro loggers and 40% consumer.  Demand is driven by wear and tear/replacement.  Geographically it breaks up as roughly 30% NA, 35% Europe, 35% rest of world.

     

    FRAG (Farm, Ranch, and Agriculture) represents 28% of total sales:  This a collection of businesses BLT has acquired over the past two years.  65% of this segment is Woods/Tisco which makes attachments (think mowers, backhoes, etc) and replacement parts for agricultural equipment.  The other 35% is SpeeCo which makes log splitters and replacement tractor parts.   Demand is tied to farming activity (literally activity/usage, not farmer income).  90% of this segment’s revenues come from North America.

     

    CCF (Concrete Cutting and Finishing) represents 2% of sales: Too small to talk about but its saw chain that can cut through basically anything.

     

    Thesis

     

    Blount has been left in the dust among a peer group that has been on fire over the past 18 months due to macro pressure in Europe, the drought of 2012 impacting farming activity, and acquisition integration issues.  Not only that, but in February they announced their largest customer, Husqvarna, was going to produce its own saw chain starting in 2015…..what else could go wrong???

     

    The answer is not much.......and the reasons to own Blount from here are:

     

    1)Business in Europe appears to be bottoming

    • Their direct to end user business was up 10% in Q1, while there is always a 3-4 month lag management feels this is a leading indicator for their distributors needing to restock inventories
    • In 2012 Europe was (11.8%) organically, in Q1 2013 it was (5.5%).  Again, this is a relatively steady replacement business, the dealer channel can only let its inventory get so low….

     

    2)A rebound in US housing starts from the current 900k-1M run rate to a more normalized 1.4-1.5M will be a boon to their North American business

    • Pretty self-explanatory, more starts = more lumber = more logging = more saw chain

     

    3)The 2012 drought hurt FRAG, not only has this created an easy comp but 2013 looks great on an absolute basis

    • Last year the drought hit yields hard, this meant farmers logged less hours on their tractors and burned through less replacement parts.  The wet and prolonged spring of 2013 has also had a negative impact (a $5M push, as stated on the conference call, this is material for a $60-65M/qtr business)
    • However, due to the high grain prices the drought created the USDA is projecting a record planting of 174.4M acres of corn and soybeans.  This will be a big tailwind, especially later in the year.

     

    4)To date management has botched the integration of its FRAG segment acquisitions and as a result it is under-earning in a big way right now.  

    • TTM EBITDA margins are roughly 4%, for perspective this is what the businesses looked like when acquired
      • SpeeCo, July 2010—TTM revenues of $77M, EBITDA of $12.5M (16.2% margin)
      • Woods/TISCO, September 2011—TTM revenues $164M, EBITDA $20.3 (12.4% margin)
      • The real culprit was SpeeCo, in 2011/12 they had major issues integrating it into their Kansas City plant which resulted in both incremental spending and lost orders.  They also faced a small product recall in Q4 2012. 
      • Management has guided to this being a $300M+ revenue business with 15% EBITDA margins within 2-3 years

     

    5)FCF is temporarily being depressed by higher than normal capex spend            

    • Due the build out of their plant in Fuzhou, China, which started in late 2011 and spending on integration and facilities for the Woods/TISCO/SpeeCo acquisitions capex was elevated in 2012 at $50M.  It will come down to $45M in 2013 and management has stated that it will decline further in 2014.  They have pegged a normalized level at $30-35M ($20M maintenance + $10-15M growth)

     

    A note on Husqvarna

     

    On February 13th BLT declined almost 18% on the news that their largest customer, Husqvarna, would be building their own saw chain capacity starting in 2015.  They represent 8% (roughly $80M) of total company sales.  While this is definitely bad news the reaction is way overdone and the situation is manageable.  Here are some details around the relationship:

    • Of the $80M, only ½ the business is saw chain
    • BLT is currently Husqvarna’s sole supplier of saw chain.  They provide them with 38M feet of chain.  The mix is roughly 1/3 Original Equipment (OE) and 2/3 aftermarket.  This is important, because BLT already competes with Husqvarna in aftermarket, sounds dumb, but they sell them chain and then watch Husqvarna fight them with price at retail.  So really they will likely lose the $13M of OE business starting in 2015 and have to compete at retail (like they already are) for the other $37M
    • According to management you need 15-20M feet of capacity to scale and break even (so max of ½ the saw chain business with BLT currently), they believe it is going to be very tight to build that out within the next 18 months, and if they do get it done it will be high cost product, so their ability to come in and price aggressively seems limited

     

    A negative, but I peg the impact to 2015 at $20M if they get 20M feet of capacity online, that will represent a 2% headwind and BLT have a year and a half to align their capacity appropriately so utilization/margins don’t get whacked.


    Valuation


     

    Market Cap $13.89 X 50m shares   $695  
    Cash         $14  
    Debt         $493  
    Pension         $95  
    EV         $1,269  
                 
                 
        2011 2012 2013 2014 2015
    Revenue            
      FLAG 660 650 665 695 710
      FRAG 147 250 255 265 280
      CCF 24 26 26 26 26
      Total 831 926 946 986 1016
                 
    EBITDA            
      FLAG 140.2 134.5 138.3 146.0 151.2
      Margin 21.2% 20.7% 20.8% 21.0% 21.3%
      FRAG 14.4 8.8 20 29 36
      Margin 9.8% 3.5% 7.8% 10.9% 12.9%
      Corp -21 -19.5 -11 -11 -11
        133.9 124.0 147.6 164.3 176.6
                 
    D&A   35.7 45 45 45 45
    Interest   18.7 17.3 18.5 17 16
    Pre-Tax   79.5 61.7 84.1 102.3 115.6
    Tax   29.8 23.2 31.5 38.4 43.3
    NI   49.7 38.6 52.6 63.9 72.2
    Stk Comp   4.4 5.5 5.5 5.5 5.5
    Amort             
    of intang.   15.8 15.9 15 15 15
                 
    S/O   49.4 49.9 50.3 50.7 51.2
                 
    Cash EPS    $       1.41  $       1.20  $       1.45  $       1.67  $        1.81
                 
    NI   49.7 38.6 52.6 63.9 72.2
    D&A   35.7 45 45 45 45
    CapEx   40 52 45 35 35
    FCF   45.4 31.6 52.6 73.9 82.2
    Per Share    $       0.92  $       0.63  $       1.05  $       1.46  $        1.61



    BLT doesn’t scream cheap at first glance, but as highlighted above, they are currently coming out of a tough 18 month stretch and sales/profitability are troughing.  I believe my numbers are conservative and can get close to $2.00 in earning power a few years out once they find their stride and start using the FCF to pay down debt.  Its tough to find a pure comp for BLT, but I’d look to TTC/SMG/Husqvarna and 12x the out year earnings number looks reasonable, this brings me to a $20 target.

     


    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

     

    Messages


    SubjectPE Interest
    Entry05/23/2013 04:25 PM
    MemberValueGuy
    Any thoughts on the recent intrest show by that PE firm - the name of the firm escapes me now.  This was an LBO many years ago. Thanks for the posting, do you think any other competitors decide to get into the business?
     
    Thanks for the post.

    SubjectRE: PE Interest
    Entry05/23/2013 05:31 PM
    Memberril1212
    Hi ValueGuy
     
    It was originally spun from Lehman's merchant bank in 2004.  No particular thoughts on P2 Capital, they have been invovled since Q3 2011, I have heard second hand that they would prefer the investment to work out passively but may get more aggressive if it really falls out of bed.
     
    In terms of competitors, their major competitor right now is Stihl.  The two of them have 90%+ market share in the developed world and slightly less in emerging markets (the Chinese do make a product, although apparently injuries are common and you learn your lesson quickly...).  Between Stihl and Husqvarna they control 75-80% of the Chainsaw OEM market, so I'm not sure another company would be large enough to enter or  feel like competiting against the dominant market players.
     
    I think a lot of rationale behind Husqvarna building out their own capacity is they no longer want to rely on BLT as their only source for saw chain, so I'm not taking it as an indicator that there will be more competitors jumping into the industry.  But hey, when money is free......
     
     

    SubjectMargin expansion potential
    Entry05/29/2013 06:05 PM
    Membergary9
    Nice writeup. A few questions on margins
     
     
    A) You talk about a material margin opportunity in FRAG, and model in EBITDA going from 3.5% in '12A to 12.9% in '15%. Did you get that by explicitly baking in cost savings and applying an incremental margin to the $30mm of sales lift ($280mm - $250mm) in the period? Wasn't clear given you said management guided to 15% margins on $300mm business - how much would that extra $20mm of sales ($300mm - $280mm) add to EBITDA - maybe $8mm? In that case they'd have $44mm EBITDA ($36mm you had + $8mm) on $300mm of sales or 14.6% margin which is still below the guidance. 
     
    B) Is there a margin opportunity of any sort in FLAG beyond operating leverage? Taking your '15E EBITDA relative to '12A, I calculate a 28% incremental EBITDA margin, which seems reasonable for a business if it is mostly variable cost .. what is the mix of fixed/variable cost
     
    C) What are pricing trends? Just trying to get a sense for how much of the revenue pickup is units vs price, where the latter really helps margins. You'd think that in a oligopoloy they should be able to push 2-3% price annually with little pushback
     
    Thanks!!

    SubjectRE: Margin expansion potential
    Entry06/01/2013 12:07 PM
    Memberril1212

    Thanks for the questions gary, apologies for the late response

     1)  I think we are on the same page here.  I agree with your math.  But to be conservative, and because management has dropped the ball thus far, I’m not baking in full credit for their targets.  I hope to be pleasantly surprised.  Given the margin structure of the businesses when they were acquired 15% is by no means heroic and I bet they could do a bit better.

    2) I don’t have a definitive answer for you on the exact cost structure, will come back to you on it.  I will say that the business has run at gross margins as high as 36-37% and 33-34% seems to be the norm going back a decade or so.  While they don’t break out GM for FLAG, it is likely running close to the 31% it was at in 2011 due to negative mix shift away from saw chain in Europe (that is the highest margin product).

    3) Pricing trends have been as follows (note this is price/mix, but you’ll get the idea):

    2009       +4%

    2010       -0.4%

    2011       +2.8%

    2012       +1.6%

    Q1 13     -0.4%  (it was noted on the call this was mostly mix)

    Hope that helps

     


    SubjectRE: HUSQB new facility
    Entry07/08/2013 05:12 PM
    Memberril1212
    Hi Jaxson
     
    For full disclosure, I have not been able to get anyone at Husqvarna to talk to me on the specifics of their capacity expansion.  So I'm relying on my conversations with BLT mgmt to make my assumptions, not sure if you have met them in the past, but we've been following the stock since 2009 and have found them to be honest and straightforward guys.
     
    One small note, when they say a "foot" of capacity, they mean a foot of saw chain not a square foot.
     
    These are the details I have:
    -HUSQB has not broken out the $150M spend into saw chain and cylinders
    -they buy roughly 38M feet from BLT right now
    -from conversations w/HUSQB this is their take on the situation: they plan to have 15-20M feet of capacity by 2015 (although BLT believes this may be tough to accomplish), they plan to only build pro grade chain no consumer stuff (pro is about 60% of the mix)
    -they believe that even at 20M feet of capacity the chain will be relatively high cost, so pricing aggressively in the aftermarket will be difficult
     
    Since BLT is HUSQB's only source for chain it is probably in their best interest to keep them relatively honestly informed for the time being, so I believe mgmt's comments can be taken with more than a grain of salt.  If something goes wrong on their end they can't really go running over to Stihl.
     
    I thought this comment on the HUSQV Feburary call was instructive (bold is mine):
     
     
    And then when it comes to [indiscernible] (32:33) the reaction will be from – yes, it's – in this market, there are mainly two who have 90% of the production of these chains for chainsaws worldwide. And today, there is not enough capacity. That's the reason why we want a full control over this very important component for the chainsaws by ourselves in-house here. And of course, we're able to increase our margin here. Will there be some reactions from our other suppliers when it comes to this, I doubt that. Most likely not, but that's something I can't comment which reaction that will be.  Of course, we have informed yesterday the sale of the supplier of the chainsaws here. And we have good relationship with them, and we will have that even in the future, we source some other components from them as well.


     
    As for the production cost, since BLT is so much further along the efficiency curve it would be tough to extrapolate that to a company starting from scratch.

    Subjectanyone still following?
    Entry08/05/2015 02:42 PM
    Membercan869

    wondering if we are near a bottom given capitulation today on earnings.. any thoughts?

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