May 22, 2020 - 4:39pm EST by
2020 2021
Price: 9.35 EPS 1.5 1.9
Shares Out. (in M): 5 P/E 6.2 4.9
Market Cap (in $M): 43 P/FCF 6 5
Net Debt (in $M): 15 EBIT 9 12
TEV ($): 58 TEV/EBIT 6.4 5.0

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We wrote up our favorite steam boiler company,  Burnham Holdings, Inc. (BURCA) over five years ago. (We would suggest you take a look at our 2015 write up.) We did very well last time as our investment just about doubled from our recommended price. BURCA's price collapsed in April, like the rest of the market, but it's shares have not recovered. A poor first quarter has not helped the market's perception of the Company and the share price has not recovered like the rest of the market, as a warm winter and the early impact of the Covid-19 pandemic depressed earnings leading to an operating loss in the first quarter.

For some background, let me quote from my old write-up, "BURCA is a leading domestic manufacturer of boilers, and related HVAC products and accessories for residential, commercial and industrial markets. Over its long history the Company has demonstrated the attributes of an excellent business with a highly competent and shareholder friendly management." As an example of it's shareholder commitment on April 27, 2020 the Company announced its regularly quarterly dividend of $.22 per share, $.88 annualized. At its current price of $9.35 this translates to a yield of 9.4%, with no indication that the dividend is about to be cut. (The Company is very liquid with $6 million in cash and a positive cash flow.) The Company has been paying shareholder dividends for almost 75 consecutive years! That's pretty damn good for a small Company in my book! Even if the stock stays stuck at around $10, which we do not expect, you can collect a nice 9% yield in a zero interest rate environment!

The good news is people need to heat their homes whether there is a pandemic or not. When your boiler fails you will fix it or replace it. It's obviously not a luxury item. BURCA was not shut down because of the pandemic as it is, obviously, designated as an essential business. Sales are not lost because of a pandemic or because of work at home policies. (It could be argued that residential boiler sales will increase as people stay at home this winter and run their boilers longer. This will lead to more wear and tear on their boilers and a greater need for replacements.) Perhaps the plumber may put in a short term fix, but if a boiler is failing it will inevitably have to be replaced. Sales may be deferred, if possible, but if your building is freezing, you don't have much of a choice.

As we look for companies that will not only survive but thrive despite the pandemic, BURCA is definitely one of them, especially at its current valuation. At $9.35 the shares sell at 50% of tangible book value, less than five times 2019 earnings, at a yield of 9.4% and at 5 to 10 times projected 2020 earnings. If in 2021, as many expect, the economy returns to normal, we may be looking at a stock selling for five to six times earnings! Like most companies, earnings for 2020 are difficult to predict, but if we get a cold winter and given that some sales have been deferred from the first quarter, the Company should have a respectable second half  this year. In 2019 it earned $1.91 per share and had an excellent year. This year earnings should range from $1 to $1.50 is our guess, depending on market conditions. But, obviously this will be impacted by how soon we find a treatment for Covid-19. In any case, virus or no virus, people will have to heat their homes and if their old boiler fails, they will replace it. It's as much a necessity as food!

Looking at the balance sheet and liquidity, at the end of the first quarter the Company $5.8 million in cash and total debt of $20.9 million (versus equity of $84.5 million). The Company has ample cash and liquidity as it recently extended its $72 million credit line for a five year term ending January 31, 2025. 

The Company has modified all operations to comply with all Federal and local requirements to keep its employees safe. Each of the Company's subsidiaries has modified operations to maximize social distancing and employee safety, including staggered work times, increased daily cleaning, enhanced work from home capabilities for support staff, elimination of non-essential travel, and use of appropriate personal protection equipment.  Other actions include expense controls to offset the impact of the uncertain environment. The Company, however, is continuing its investments in new product development and sales and marketing as it continues to execute its strategic plan. This is a great opportunity to take advantage of weaker competitors. 

So, what should we be concerned about?

1) The shares are traded on the OTC Small Cap Market  and the Company is deregistered, thus not required to file quarterly statements, but it does file comprehensive quarterly statements and press releases. So, disclosure is not an issue.

2) Liquidity of the shares is fair. Accumulating a position may take time.

3) The Company's sales have some cyclicality and are tied, to some extend, to the real estate market and new home construction.

4) Management only owns about 11% of the Company's outstanding shares.

5) If it takes several years to find an effective treatment for Covid-19, the shares may languish at these levels longer than expected.


This is a simple, straightforward recommendation. This recommendation does not depend on finding a vaccine in six months or even a year. BURCA has proven itself to be a solid dependable Company over a long period with many recessions and challenges. Its products are essential and non-discretionary and will not be taken over by the Internet and e-commerce. Show me have you design a virtual boiler that heats your home or office building! The Company has demonstrated over almost 75 years that it rewards shareholders with consistent dividends. It can certainly manage through the Covid-19 pandemic and come out a stronger Company. Its current valuation reflects none of the positive attributes of the Company and assumes the Company will never regain its sales and profitability, which is inconsistent with everything we know.









I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


A recovery in the economy and the inevitable end to the pandemic (whether it takes six months or two years) will result in a return to earnings in the ballpark of $2 per share which will drive the shares back to the $20 level. 

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