Juno Lighting is a leader in the design, manufacture and marketing of architectural grade recessed and trac lighting products for use in remodelling and new construction of commercial, residential and institutional buildings. Juno’s principal products use incandescent, high intensity discharge and fluorescent light sources and are designed for attractive appearance, reliable and flexible function, efficient operation and simple installation and servicing. Juno is the largest independent designer and manufacturer of trac and recessed lighting in the nation.
I believe Juno shares are an attractive investment because they provide the opportunity to participate in what is essentially a publicly traded leveraged buyout of an attractive, well-run company with a strong market position. The current trading price implies trading multiples that are similar to or cheaper than publicly traded comparables (AYI, GLYT, LYTS), yet Juno has higher margins and stronger growth. Juno generates considerable free cash flow and recently paid a special cash dividend of $6.83 per share while at the same time refinancing expensive high-yield debt with much cheaper term bank debt.
More than 90% of Juno’s sales are in the US with the balance in Canada, and the Company’s products are sold mostly to electrical distributors as well as wholesale lighting outlets. According to the 10-K, “the Company has established itself as a preferred lighting supplier by providing high quality and well-designed products, superior customer service, timely delivery, technical advice and product training." “The Company believes that its growth has been attributable principally to the design and construction of its products, the quality of its sales force and its reputation for prompt delivery and service.” The above pretty much sums up Juno’s strategy and market positioning.
In March 1999, Fremont Partners acquired control of Juno in a merger and recapitalization transaction that left 2.4 million shares in the hands of public shareholders. These types of transactions were popular in the late 90s because they avoided the creation of goodwill on the balance sheet (and amortization thereof against earnings) of the target company by virtue of the continued ownership by public shareholders.
The 1999 merger/recap was financed with $95 million of secured bank debt, $125 million of 11.875% high yield bonds, $106 million of convertible preferred stock purchased by the LBO sponsor, Fremont Partners, and $103 million of cash on the balance sheet, for a total of $429 million, which covered the cost of cashing out all buy 2.4 million shares at $25 per share, existing debt repayment, and fees and expenses. The high yield bonds were recently refinanced with the proceeds of term bank debt.
In Q3 2004, Juno paid a special $6.83 per share cash dividend to shareholders, for a total payout of $60 million. Because of the special cash dividend, the stated amount and conversion price of the convertible preferred shares were reduced to account for the special dividend. The fact that the Company paid out a special cash dividend meant to me that the Company wanted to reward shareholders in the current environment where the tax rate on dividends is as low as it has been in a long time. I also viewed the special dividend as a vote of confidence in the prospects of the Company since the payment required an increase in leverage (perhaps the Board felt the Company was starting to pay too much in taxes as well).
Fremont Partners, with $1.8 billion in equity capital, is part of the Fremont Group; a San Francisco based private investment company with $11 billion in assets owned by members of the Bechtel family. Juno is one of six companies in the Fremont Partners II Fund, the second of three Fremont Partners funds. Fremont Partners tends to focus on middle market companies with strong management teams (who invest meaningfully alongside Fremont) that are leaders in their market segments. Looking at the three companies in the Fremont Partners I Fund, two were sold (one after three years and the other after five years), and the third was IPOed after three years. The six portfolio companies in Fremont Partners II were acquired between 1997 and 2000 and none has been exited from yet. Fremont controls approximately 75% of Juno on an “as converted” basis.
The $25 per share Juno merger/recap transaction price at the time the transaction was announced represented 2.3x trailing revenues, 9.0x trailing EBITDA, and 17.5x trailing earnings.
Using the most conservative approach and assuming full conversion of the LBO sponsor’s convertible preferred shares, Juno currently is trading at the following pro-forma (for recent refinancing) trailing multiples: 2.4x revenues, 10.6x EBITDA, and 15x earnings. Since the Company cannot force conversion of the preferred stock for a number of years yet, GAAP fully diluted earnings are calculated assuming no conversion of the preferred, which would gives the following trailing multiples, pro-forma for the recent refinancing: 2.4x revenues, 8.1x EBITDA, and 9.5x earnings. These multiples seem cheap for a company that has grown its EBITDA at over 18% annualized for the past seven quarters.
The following table summarizes the financial performance of Juno at the time prior to the announcement of the transaction announcement and over the past few years:
As mentioned earlier, cash flow generation is impressive, as shown below:
For the LTM 31-Aug-04 ($mil, except per share):
Interest Expense 9.3 (pro forma for the refinancing in fiscal Q3-04)
Other Expense 0.5
Taxes 14.5 (at an assumed tax 37% rate)
Cash Earnings 30.1 (or $3.42/sh. assuming full conversion of the cvt. preferred)
Capex 2.8 (low CapEx needs helps make this attractive LBO)
less CapEx 27.3 (or $3.10/sh. assuming full conversion of the cvt preferred)
Based on the above, Juno is trading at 12.3 times cash earnings and 13.5x cash earnings minus CapEx for a company growing EBITDA at levels approaching 20% annualized. Maybe it’s not the purest definition of a value stock, but it certainly is growth at a very reasonable price.
Judging by Fremont’s success with the Fremont Partners I Fund, the catalyst for the investment is obviously a sale (since Juno is public, an IPO/secondary doesn’t really make sense as an exit strategy).