March 02, 2010 - 4:39pm EST by
2010 2011
Price: 11.00 EPS $1.20 $1.40
Shares Out. (in M): 4 P/E 9.2x 7.9x
Market Cap (in $M): 49 P/FCF 6.1x 5.5x
Net Debt (in $M): 16 EBIT 9 11
TEV ($): 65 TEV/EBIT 6.9x 6.0x

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Burnham Holdings, Inc., (Pink Sheets: 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. The shares collapsed after the recent Great Recession and have simply not recovered despite the Company's excellent performance. We believe the shares are very attractive at their current levels. 

To illustrate why we respect management and the Company, let us consider the Company's latest results for fiscal 2009 ending in December.  Like most industrial companies, the Company's 2009 sales were hurt by the recession, as sales were down 18.6%, but earnings per share were an impressive $1.20, only slightly lower than last year's $1.30. These flat earnings were not driven by any special charges, but by prudent expense and margin management. Management clearly demonstrated their experience and ability to effectively mange through challenging economic times.  In addition, the Company improved its balance sheet as debt was reduced to the lowest level in over 12 years.  Finally, the Company demonstrated it commitment to shareholders and confidence in the future by paying stock dividends for the 69th consecutive year at the annual rate of $0.68 per share for a yield of over 6% and at the same rate as 2008 and 2007. 

 In our business we all see thousands of stock recommendations with intricate and complex arguments of why we should buy this company or short this other one. To make everyone's review efficient and expeditious let me "cut to the chase."

Why we believe BURCA shares are attractive:


  • Management has demonstrated a rare ability to effectively manage the Company through difficult market cycles and maintain good profitability.
  • The Company has paid a dividend for 69 consecutive years and the shares currently yield over 6%.The stock currently trades for about 9 times depressed cyclical low earnings.
  • Recovery earnings of significantly over $2 per share can reasonable be expected over the next few years, giving the shares a forward P/E of about 5.
  • The Company's product is not a luxury item but a necessity. How did you react the last time your boiler stopped working? Did you worry about the cost of the repair or did you simply want to warm up your house? The Company's major product, steam boilers, dominates heating in the US Northeast and as boilers age they will ultimately need to be replaced even if the economy does not recover. Boilers are not a luxury item and when they get old and inefficient or simply wear out they are replaced.
  • In 2009 the Company generated over $14 million in EBITDA. With a market capitalization of about $49 million, the shares trade for 3.5 times EBITDA. (Capital expenditures for 2009 were $2.1 million.)
  • The Company generated about $8 million ($1.80 per share) of net free cash flow (Net Income plus depreciation less capital expenditures) in 2009. The shares thus trade for about six times free cash flow.
  • Management stated in its latest press release, "Cash flow from operations was at the highest level since the mid-1990s, providing the ability to fund operating expenses while also providing the funds to develop new products, make necessary investments in capital assets, make principal repayments, and pay dividends to our stockholders."
  • The balance sheet is solid with $44 million of working capital and a reasonable ratio of debt to equity.
  • The Company's brand's are highly regarded and well established in the market.


What concerns us about BURCA:


  • The shares are traded on the Pink Sheets and require patience to purchase.
  • BURCA is a deregistered "non-reporting" company which is not subject to the SEC reporting requirements. Thus, disclosure is not at the same level as registered companies. (The Company does provide quarterly reports with complete financial statements and a comprehensive annual report.)
  • The Company's sales are cyclical and are tied, to some extent, to the real estate market and new home construction.
  • The Company has a $21 million unfunded pension liability which resulted from the stock sell-off of 2008.
  • Current business conditions remain difficult.
  •  Management only owns about 11% of the outstanding shares.


2009 Performance

Net sales for 2009 were $183.7 million, down $42.1 million or 18.6% from last year's $225.8 million.  The residential portion of the Company's business continued to experience a cyclical downturn from the robust levels of 2004 and 2005.  This decline is the result of the economic cycle that not only has impacted Burnham Holdings but also the overall industry.  The Company was particularly hurt by the decline in the real estate market and its impact on home construction, consumer confidence and spending behaviors.  The 2009 market for residential products was down 19.3% in units from 2008 and 29.3% from the average of the past five years.  The commercial portion of the Company's business services provides heating applications for large commercial, institutional and industrial facilities such as hospitals, factories, hotels, and schools.  This segment experienced modest growth in sales from 2004 through 2007, which mitigated the downturn in the residential portion of the business.  However, in mid-2008, the commercial segment began to feel the impact of constraints on spending in the sector, which continued into 2009 and resulted in lower sales for this portion of the Company's business.  The Company's states that the strategies of product diversification, independent markets served, and continuous new product introductions, have resulted in a less dramatic decline in sales trend for the last five years compared to the overall boiler industry. 

 Net income for 2009 was $5.3 million, or $1.20 per basic share, not significantly lower than the $5.8 million, or $1.30 per basic share, reported for 2008.  The stability of the bottom line was accomplished in spite of the decline in industry units and a highly competitive pricing environment.  With net sales declining and the need to remain competitive in the market, management prudently increased emphasis on cost control and resource optimization, both facility and manpower, in order to maintain operating margins.  Through strict spending policies and flexibility with manufacturing capabilities, management was highly successful in the effort of balancing the building of inventory and covering the costs of fixed overhead, while having the inventory necessary to meet demand during the peak seasonal periods.  As a result, manufacturing overhead expenses and production variances declined in 2009 from the prior year by nearly $10 million.  These lower expenses further built upon the reductions implemented in 2008, increased operating margins equal to the highest level within the last five years.  Management has steadily continued the process of reducing selling, administrative and general expenses ("SG&A").  The 2009 SG&A expenses, which declined by nearly $5 million from 2008, are at their lowest dollar level for at least the last 12 years.  This has been accomplished through a careful review of processes, personnel, and programs, to ensure that the Company is benefiting from these services while continuing to meet the needs of its customers.

Although current business conditions remain difficult, management is optimistic about longer-term prospects for the Company.  They state in their latest press release, "Existing boilers will continue to be replaced over time due to age or operating costs.  Our powerful lineup of high-efficiency residential and commercial products sold through the subsidiary companies; position them well in the market.  These products are top-quality, high-value equipment for virtually any application." 

Our recommendation is to purchase BURCA at 3.5 times EBITDA and collect your 6.2% dividend as you wait for the economy to recover. The Company's annual report should be available on its website on or around March 19 (BurnhamHoldings.com)


1) Improved earnings in 2010 and beyond

2) Rising dividends

3) Market recognition of the Company's undervaluation

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