STEINWAY MUSICAL INSTRS INC LVB
May 20, 2013 - 11:35pm EST by
otto695
2013 2014
Price: 25.55 EPS $0.00 $0.00
Shares Out. (in M): 13 P/E 0.0x 0.0x
Market Cap (in $M): 318 P/FCF 0.0x 0.0x
Net Debt (in $M): -35 EBIT 0 0
TEV ($): 283 TEV/EBIT 0.0x 0.0x

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  • Underfollowed
  • Real Estate Monetization
  • Special Dividend

Description

Summary:

I see LVB doubling or more from current levels.  LVB is trading at 5.7x Free cash flow (TEV/EBITDA-Capex) versus a historical range of 9-12x with business on the cusp of meaningful acceleration and multiple catalysts that will unfold in the coming days and weeks.  I would refer you to the prior writeup on VIC for background and would suggest you listen to the last conference call as the acceleration in revenues as well as many of the relevant short-term catalysts were hinted at or outright discussed on the call.  Clearly the market has yet to begin to appreciate these changes which I think can be attributed to this being a relatively underfollowed situation-- for example, this call lasted all of 24 minutes & the company is only followed by one analyst, who has yet to make any changes to his model post-call and (judging by the list of participants) did not even participate on the call).

Here is a snapshot of the imminent & near-term catalysts:

  • closing of the sale of their west 57th street real estate which will net LVB approximately $40M or $3.20/share.  This will close any day.  In addition to the proceeds from this sale, keep in mind that this building was costing them $5.7M/year-- a $0.29/cent hit to the P&L per year aftertax.  The closing of this sale will in turn trigger the following:

 

  • announcement of a special dividend and/or ongoing dividend and/or stock buyback (see call for discussion of thistiming: July/August)

 

  • a balance sheet recapitalization, possibly buying in some of the  $67M, 7% bonds.  Matures 3/14. (see call for discussion of this.  Timing: July/August)

 

  • launching revitalized IR effort (this relatively moribund, under-followed company actually announced this on the conf call; timing: to begin in June with conference participations, analyst days, etc. all being planned now)

 

  • blowout earnings for next two quarters.  The one analyst who covers LVB does not appear to have accounted for the significant uptick in orders coming out of Q1 or the reduction in quarterly expenses related to the sale for the 57th street property which will begin in Q3, nor the reduction in legal fees on a year-over year basis.  For example, in Q2 alone last year, LVB had $2.0m in legal fees (they had 5.0m for the full year last year).  This will not recur this year.  The Street estimate is 34 cents for Q2.  My estimate is 44 cents.  I think the upside to the Street estimates will be even bigger in 2H.  Overall, I am expecting $2.15 this year versus the Street estimate of $1.75.

 

Some (not all) relevant quotes from last quarter conf call:

"We have excellent prospects for increased growth and profitability in our core businesses and we expect to generate significant cash from operations in 2013 and beyond."

 

"our order book is strong for the remainder of the year and we expect to be up meaningfully over the prior year.... Our order rate in Europe is up 19% over the same period last year. "

 

On the Band segment: "The order rates are up and we expect very strong results in the second and third quarter this year."

 

Cyclical tailwinds & secular growth kicking in at the same time:

housing and consumer confidence  upcycles appear in place

growth being driven ex-USA as high-end elite has begun to appreciate quality of Steinway instruments

retail growth in US led by middle-market Boston and Essex brands gaining market share

decrease in value of the Yen has put LVB at a level playing field at this point with Japanese manufacturers like Yamaha

 

Other one-time expenses to end:

extra training expenses (not  quantified) in Hamburg manufacturing facility to end by end of Q2

consolidation of two facilities in US to be fully completed by end of Q2 (savings not quantified)

 

Other assets:

This company still has significant owned real estate on its books, including a large facility in Long island City Queens (please see thread from prior writeup for more details about its potential value).  The aggregate value of these assets could exceed $200M or $15/share. 

 

Psychology poised to turn:

This is not a well-followed name, but for those involved, I think there has been alot of fatigue due to several "strategic alternative searches" which failed, asset sales which took much longer to consummate than hoped along with some "one-time" operational events such as a strike at one of the company's facilities.  Following the closing of the real estate sale in the short-run, investors will begin to assess the business anew as a very cheap ongoing public entity with tremendous brand value that is simply generating a large amount of cash with decent/good growth prospects over the next several years, still hidden real-estate value, an underleveraged B/S with a mounting net cash position, and as a company more willing to return cash to shareholders through dividends and buybacks.

 

Valuation/Target Price:

The period from 2013 through 2015 appears to be setting up to be similar-- and likely much better than-- the period form 2004-2007.  During this prior period, LVB grew its top line in the low single digits and traded at a multiple of 9-12x free cash flow (EBITDA-Capex).  I am suggesting that LVB will do better than this over the coming three year period, with mid-single to upper single digit growth in 2014-15 following double digit growth for the balance of this year.  Using the midpoint of this range seems reasonable, or 10.5x free cash flow (EBITDA-capex).  This yields a target current/near-term price of $47:

10.5x $50M in 2013 EBITDA-Capex= $525M TEV

add $35M in net cash on B/S post asset sale

add $25M in cash added to B/S over balance of 2013

Target EV= $585M/12.5M shares= $46.80

 

In other words, this could be a reasonable value for where the stock could be RIGHT NOW or in the very short run, once investors realize what is happening with this company.  Further, with an expectation that once 2014 estimates are developed, the stock could trade closer to $58 within a year, using $62M in free cash flow for 2014 along with another $20M added to the B/S by mid-2014.

 

There is even reason to suggest that LVB could trade to the high end of the FCF multiple range (12x) given the better growth profile, current interest rate environment relative to the 2004-2007 period as well as the likely commencement of dividends/buybacks. 

 

And, again this valuation analysis gives no value to the considerable owned real estate, trademark value etc. on the balance sheet.

 

Risks:

global slowdown

housing downturn

57th street property sale not going through

 

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

Catalyst

Closing of the property sale (any day)
Revitalized IR effort (to begin June)
Dividend/buyback announced (July/August)
B/S recap (July/August)
Very strong earnings and revenue growth acceleration (beginning with current quarter)
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