Huttig Building Products HBP
August 27, 2000 - 2:40pm EST by
michael99
2000 2001
Price: 4.31 EPS 0.72
Shares Out. (in M): 21 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 124 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

I just finished entering a bunch of data such as trailing EPS and revenues. Throw it all out the window. Huttig Building Products may be one of the most ignored, misunderstood stocks on the market, and a big reason is that superficial analysis with readily available data is, well, too superficial. Huttig Building Products (NYSE: HBP), spun-off from Crane (NYSE: CR) last year, is a leading distributor of building products such as doors, windows and trim. Value investors may recognize the opportunity that so often occurs with spin-offs. In this case, simultaneous with the spin-off, Huttig issued 6.5 million shares to acquire Rugby USA from Rugby Group PLC. The net is that even the proxy for the spin-off was worthless because it wouldn’t account for the acquisition. As a spin-off from an S&P 500 company, Huttig was guaranteed hot potato status anyway. But factor in confusing offering documents and an admittedly poor marketing job, and the stock simply could not avoid the doghouse.

The beneath-the-surface numbers follow. The leader in its very fragmented industry, Huttig has a market share of just 8% and will earn revenues topping $1.2 billion. Razor-thin margins are offset by industry-leading working capital management. In fact, the company has been profitable since the Civil War. This year, the company will see about $60 million in EBITDA plus a substantial one-time gain, yet carries an enterprise value ($89 market capitalization plus $122 million debt less $6 million cash) just about $205 million.

As the industry’s most efficient operator (with management firmly ensconced in a shareholder-friendly EVA compensation model straight out of Stern & Stewart), Huttig is ahead of plan to squeeze $15 million in synergies out of Rugby as well as bring Rugby’s poor working capital management more in line with Huttig’s other operations. Expect another $20 million to drip out of working capital within the next year. Because of these savings, Huttig in effect paid just $40 million for Rugby’s $30 million in annual EBITDA.

While Huttig’s management should get credit, some of it must be shared with the motivated seller. Rugby Group PLC is not the world’s best-managed company, to put it lightly.

Going forward, Huttig will have tremendous free cash flow. Free cash flow averaged $21 million per year for the three years before the acquisition of Rugby. Now, EBITDA jumps to at least $60 million, and free cash flow jumps to at least $35 million. Plus, in the short term, we get the $20 million or so that comes out of Rugby’s working capital. As a result of this, during calendar 2000 Huttig is well on track to bring its $122 million in debt down to $82 million. Management’s reasons for the debt-reduction? Reduced interest expense and expanded ability to pursue acquisitions. So what we are looking at is an enterprise trading at just 3.1 times EBITDA, and only about 5.1 times free cash flow. Remember – 130 years of continuous profitability.

Management follows strict return-on-investment criteria according to Stern Stewart's EVA theory and model's operations on GE's Six Sigma program. The Chairman comes from Crane and is known to be a shareholder advocate.

Catalyst

Sheer value is something of a catalyst here, but there are other key aspects to consider. Rugby Group PLC holds nearly a third of Huttig's share and is a price-insensitive seller on the market. This introduces price risk but not business risk. The shares are not liquid, and Seth Klarman is said to have bought up to 20% of Huttig's shares. If so, consider those shares locked up. Klarman is known as an extremely disciplined deep value investor. Once the Rugby Group shares are on the market, look for a buyout of Huttig. The buyout could come from inside (management) and a private market valuation based on recent activity places the shares at a worth over $12-15/share. Again, the Chairman is a shareholder steward - Crane investment arm still has an investment in Huttig - and would not let the takeout go through much lower than private market value. I'm looking for action within the next year. In the meantime, a large distributor of wholesale doors left the business. Huttig is expanding to meet the demand. Because of this, sales may rise over the next year or two even if, as seems probable, the homebuilding market turns south. Finally, spin-offs often reach a price nadir about one-year after the spin-off date; it takes that long for the knee-jerk sales to stop. By early 2001, the nadir should be behind us.
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    Description

    I just finished entering a bunch of data such as trailing EPS and revenues. Throw it all out the window. Huttig Building Products may be one of the most ignored, misunderstood stocks on the market, and a big reason is that superficial analysis with readily available data is, well, too superficial. Huttig Building Products (NYSE: HBP), spun-off from Crane (NYSE: CR) last year, is a leading distributor of building products such as doors, windows and trim. Value investors may recognize the opportunity that so often occurs with spin-offs. In this case, simultaneous with the spin-off, Huttig issued 6.5 million shares to acquire Rugby USA from Rugby Group PLC. The net is that even the proxy for the spin-off was worthless because it wouldn’t account for the acquisition. As a spin-off from an S&P 500 company, Huttig was guaranteed hot potato status anyway. But factor in confusing offering documents and an admittedly poor marketing job, and the stock simply could not avoid the doghouse.

    The beneath-the-surface numbers follow. The leader in its very fragmented industry, Huttig has a market share of just 8% and will earn revenues topping $1.2 billion. Razor-thin margins are offset by industry-leading working capital management. In fact, the company has been profitable since the Civil War. This year, the company will see about $60 million in EBITDA plus a substantial one-time gain, yet carries an enterprise value ($89 market capitalization plus $122 million debt less $6 million cash) just about $205 million.

    As the industry’s most efficient operator (with management firmly ensconced in a shareholder-friendly EVA compensation model straight out of Stern & Stewart), Huttig is ahead of plan to squeeze $15 million in synergies out of Rugby as well as bring Rugby’s poor working capital management more in line with Huttig’s other operations. Expect another $20 million to drip out of working capital within the next year. Because of these savings, Huttig in effect paid just $40 million for Rugby’s $30 million in annual EBITDA.

    While Huttig’s management should get credit, some of it must be shared with the motivated seller. Rugby Group PLC is not the world’s best-managed company, to put it lightly.

    Going forward, Huttig will have tremendous free cash flow. Free cash flow averaged $21 million per year for the three years before the acquisition of Rugby. Now, EBITDA jumps to at least $60 million, and free cash flow jumps to at least $35 million. Plus, in the short term, we get the $20 million or so that comes out of Rugby’s working capital. As a result of this, during calendar 2000 Huttig is well on track to bring its $122 million in debt down to $82 million. Management’s reasons for the debt-reduction? Reduced interest expense and expanded ability to pursue acquisitions. So what we are looking at is an enterprise trading at just 3.1 times EBITDA, and only about 5.1 times free cash flow. Remember – 130 years of continuous profitability.

    Management follows strict return-on-investment criteria according to Stern Stewart's EVA theory and model's operations on GE's Six Sigma program. The Chairman comes from Crane and is known to be a shareholder advocate.

    Catalyst

    Sheer value is something of a catalyst here, but there are other key aspects to consider. Rugby Group PLC holds nearly a third of Huttig's share and is a price-insensitive seller on the market. This introduces price risk but not business risk. The shares are not liquid, and Seth Klarman is said to have bought up to 20% of Huttig's shares. If so, consider those shares locked up. Klarman is known as an extremely disciplined deep value investor. Once the Rugby Group shares are on the market, look for a buyout of Huttig. The buyout could come from inside (management) and a private market valuation based on recent activity places the shares at a worth over $12-15/share. Again, the Chairman is a shareholder steward - Crane investment arm still has an investment in Huttig - and would not let the takeout go through much lower than private market value. I'm looking for action within the next year. In the meantime, a large distributor of wholesale doors left the business. Huttig is expanding to meet the demand. Because of this, sales may rise over the next year or two even if, as seems probable, the homebuilding market turns south. Finally, spin-offs often reach a price nadir about one-year after the spin-off date; it takes that long for the knee-jerk sales to stop. By early 2001, the nadir should be behind us.

    Messages


    SubjectCompetition
    Entry08/28/2000 12:01 AM
    Memberjim77
    Mike... Where does Home Depot enter into the equation? Are they a customer (and to what extent) or are they a competitor?

    SubjectHuttig/Home Depot not a proble
    Entry08/28/2000 12:45 AM
    Membermichael99
    Jim, Home Depot is a customer, not a competitor. Builders can order from Huttig through Home Depot or directly from Huttig. The natural Q is would Home Depot move in to cut out Huttig? The answer is no. There are characteristics of Huttig's business that are not Home Depot's bag and make it unlikely that HD would enter Huttig's space. For instance, in doors, Huttig gets a generic door from a manufacturer and puts it through a door machine that can customize doors for different customers. At the GM level, Huttig does not worry about Home Depot getting into the door machine business. People who know HD don't worry about that either. Part of HD's success is its laser focus on retailing - managing gazillions of SKUs for the retail customer/morning pick-up contractor. Its function and focus in the food chain are different than Huttig's. In practice Huttig adds a different value to the transaction than Home Depot does - and Huttig executes its part with the same laser focus. Moreover, the opportunities in Huttig's market are growth through consolidation and applying specialized experience to newly acquired operations (squeezing the working capital, gaining economies of scale), and HD's shareholders would not appreciate such a strategy from a growth standpoint. So I see it as two expert and complementary operations functioning at the top of their respective niches. Only one is a much, much bigger bargain right now. And only one where management could realistically LBO with shareholder protections in place, creating realization of private market value. The company seems willing to talk, so I would recommend reading the annual report (not the 10K - the annual report has new information vital to the valuation) and then giving Huttig a call. Of course, I know the company pretty well by now (having already done these things), so I'd be happy to answer a few Q's touching on the vital areas. There are many positives I just couldn't fit in the initial space above, but my time is limited, so there may be some time between my responses. Good investing, Mike

    SubjectProfitable since Civil War
    Entry08/29/2000 07:36 PM
    Membermichael99
    I received a comment (not on this board) regarding Huttig's thin margins and reliance on homebuilding. I would just bring up that there is more to it than that - the company has been profitable for over 130 years despite the cycle that it is exposed too, and despite changes in management. There is nearly a 20% free cash flow yield that is very secure and is compounding into the business (no dividend). It requires some thought and analysis to understand why but focus on working capital management and asset turns. I also noticed that after attaining a 7.8, it's been given a series of lower ratings, and I would just ask that if you do not see the deep value here, then request the annual report before making a decision. It's the best idea of the year in my book, and I'm also willing to defend it if somebody takes the interest to ask questions/voice concerns. Mike

    Subject
    Entry08/29/2000 11:00 PM
    Memberdan32
    Invested capital seems very low here. According to 10K PPE was only $40mn, depreciation is $6mn and cap-x $8.5mn. This seems very low for a manufacturing company of this size. Am I missing something? Still waiting for annual report to arrive, thanks for tip.

    SubjectNot manufacturing; other vital
    Entry08/30/2000 01:13 AM
    Membermichael99
    Huttig is a distributor with a small value-added manufacturing component (such as the customization of stock doors with its door machines just prior to delivery). It is not a manufacturer. Its distribution centers consist of a warehouse with a small office and a few leased trucks. Oh, and the door machine(s) and the inventory. So PPE is going to be low. Invested capital is going to be low. This is a high return on capital business. That's what has kept it profitable for 130 years through thick and thin. Moreover, because of the remodeling/new home mix, sales only really fall about 10% during a recession, and working capital management is such that cash keeps gushing out of the company. Now, the trick is Huttig turned its inventory in the upper teens last year, causing asset turns to lead the industry by a wide margin. That's Wal-Mart good, and three times better than Target! High asset turns thanks to excellent working capital margin are what let Huttig attain 10-12%+ free cash returns on assets. Its competitors sit at a fraction of that. This is something to focus on. Rugby was acquired at the end of 1999, and its inventory and assets went on the books. But management tells me they can squeeze Rugby's working capital to very close to Huttig's traditional ratios. This is where you get $20 million dripping out of nowhere this year. You'll have to wait til 2001 to see it though, because the free cash flow comes in the fourth quarter in this business. You'll have to check out competitors to confirm this, or talk to the company, or take my word, because with Crane, Huttig's numbers weren't broken out by quarter. Just one more upon the hundreds of reasons the herd on Wall Street isn't looking this way. Yet. The numbers you are using are pre-Rugby; also, your number for depreciation is including amortization. But basically, you got it - I think of these ideas as something of a game, and that's a good catch if your thinking was that this is a manufacturing company. One wouldn't expect a 1.2 billion manufacturer to have only 40M PPE, and one would be correct. It's just not a manufacturer. When you get the annual report, you'll see management say that they can attain $15M savings by the end of 2001 just on synergies with Rugby (the businesses overlap). Remember, by the end of the year we're talking just about $170-$180 in enterprise value, so those millions are significant. Management tells me they are ahead of track there. Also well on track to paying the debt down by 1/3 out of cash flow. That will make the company more shiny for superficial investors. Crane spun off Huttig because the Huttig business is a gem that was not being appreciated by Crane's institutional clients. Needless to say, it still isn't. Everyone dumped it. Huttig is the largest, most profitable and geographically diverse company in its industry. Think Wal-Mart. That's how successful a low-margin business can be with good working capital management. Why? Because the competitors will not be as good. Share and strength will accrete to the most efficient. Also, Huttig can make acquisitions on the cheap and then make them even cheaper after the fact by squeezing working capital and reducing overlap. Huttig does 1.2 billion in sales, but doors and windows market alone is $12 billion. Huttig ain't finished yet. Well, I don't want to give away the store completely just yet. Further questions welcome. Mike

    SubjectToday's news
    Entry08/30/2000 11:21 AM
    Membermichael99
    Huttig announced today it would no longer distribute Andersen Windows. The story behind the scenes is that Andersen acquired a competitor of Huttig's called Morgan. Morgan was a door and window distributor. When Andersen Windows acquired Morgan, it could be foreseen that possibly they would not need Huttig's distribution services anymore. So the press release says there will be a charge. What the press release doesn't tell you is that Morgan no longer distributes doors as a result. The majority of that business has gone to Huttig, and in markets where they had competed, Huttig is adding door machines to try to keep up with demand. When Huttig says at the end of the press release that they see no ongoing or long-term impact, this is why - the new door business will likely offset the old window business. And it is in doors that Huttig uses the door machines to add value to the product. Management is being very conservative - in the long run this is a benefit. Wouldn't get that from the press release. Guess why? Mike

    Subject
    Entry08/31/2000 02:37 PM
    Memberdan32
    2001 Estimates of $15mn in cost savings. Is that in addition to the $7.5 expected in 2000 or is $15mn the cumulative cost savings? They mention operating as a one-step market in KC. Huttig says that this runs at 7% EBIT margins, much above company average. Do you have any idea how expandable this is to other markets, can two-steps be converted to one-steps over time? They mentioned a couple of other large competitors, but not by name. Do you know who they are?

    SubjectQuestions
    Entry08/31/2000 06:04 PM
    Memberjim77
    Mike, I haven't received the Anuual Report or investor kit yet but I had a chance to skim the online proxy, Q's and K. (I know you said they are already outdated but that's all I have right now). (1) Did any of Rugby's top people stay on? The proxy mentioned Steve Brown, president of Rugby, was going to stay on as the COO of Huttig. I would prefer otherwise and I don't see his name around. (2) A virtual 'who's who' of value investors own Huttig...Klarman, Gabelli, Ruane and Ende. Are these spin-off shares of Crane or have they been buying lately? (3) You mentioned that the fourth quarter is a the best free cash flow quarter but HBP's SEC filings seem to indicate that it's a slow one (at least as far as sales and profits). Huttig will be taking a charge in the 3rd quarter, slow in the fourth, and really slow down in the 1st quarter of '01 (because of weather). Couple that with more spin-off dumping and we may have a few months to study this one very carefully. (4) What's the story with the Rugby overhang? Are they committed sellers and are they selling currently? (5) The typical risk factors were stated in the filings but the environmental risk factor looked a little more serious than the normal boilerplate. "Huttig has been identified as a potentially responsible party in connection with the clean-up of contamination at two sites...and there is no assurance that environmental liabilities of Huttig or the combined company will not have a material adverse effect on Huttig's financial condition or results of operation". Some other distribution centers were also mentioned as contaminated sites prior to Huttig's involvement. The company feels they've reserved adaquately for any potential problems...which would be minor. In one of filings it mentioned $1.4M "related to environmental and other costs". Any potential problems (ala Armstrong) here? (6) Andersen accounted for the significant majority of Huttig's window sales in '98. Anecdotally, I have friends who are builders that insist on Andersen windows in new home construction. Will this hurt other sales because contractors want to get all their supplies from one source? (7) Along this same line the 10K stated "Huttig competes, to a limited extent, with Home Depot and Lowe's for business from smaller contractors and may in the future include more competition for the business of larger contractors". Is Huttig in a distribution market that is shrinking and needs to take market share to grow? (8) I don't know if I'm misreading between your lines...but are you implying that they aren't putting the best slant an any news because of a possible future LBO. The last real cheapie I bought (and HBP certainly fits that category in spades) also did a management LBO but shareholders weren't paid top dollar. The deal was going to be closed at less than 4 times EBITDA and the company was DEBT-FREE. (First time I was ever involved in a derivative shareholder lawsuit...but we did manage to get the price up 25%...to a more normal but still cheap 5 times EBITDA.) I don't want to testify in court again...are you comfortable that a low-ball offer won't be bid and accepted? In the other case we also had some good value investors on board such as Bill Nasgovitz of Heartland (10% of stock) but they were just content to go with the flow. Looking forward to your responses and studying this one further! Jim

    SubjectHelp the blind fool
    Entry08/31/2000 08:16 PM
    MemberSpocksBrainX
    Just wanted to point this out of front: I'm looking at this from the negative side entirely here. You said: "Free cash flow averaged $21 million per year for the three years before the acquisition of Rugby. Now, EBITDA jumps to at least $60 million, and free cash flow jumps to at least $35 million." For the first 6 months I see 8.5m in net income, 3.6m in depreciation/amort, and 2.4m in CapEx, or 9.7m. How is this going to add up to at least 35 million? AR and Inventory remained the same as the beginning of the year, so nothing came from there. You said, "As a result of this, during calendar 2000 Huttig is well on track to bring its $122 million in debt down to $82 million." So why did LTD only go down about 5m in the first half? "Management’s reasons for the debt-reduction? Reduced interest expense and expanded ability to pursue acquisitions." And not buy shares? If management is this bright and knowledgeable about their own worth why won't they consider a buyback plan of some sort? What, they are going to acquire another low margin operator and then proceed to pay down debt for that one? As a person who knows next to nothing about this biz, this bothers me in the press release: "Deflation in the commodity wood market reduced sales in the second quarter of 2000 by approximately $12 million compared to last y year." What sort of issue is this, long term? And this: ``We are pleased with our progress of integrating Rugby USA and expect to achieve the profitability improvements and cash flow benefits we planned. Although housing activity is still strong in most of the country, we expect home building to slow as we approach the end of the year,'' said Barry J. Kulpa, President and CEO. Is management in the habit of trying to blow up the share price is this just a case of far too much honesty from the gentleman? After all, he might be wrong. Most important to me - Sans acquisitions, what sort of top line growth could this company achieve? If I harsh I don't mean to - I've been burned on one 'incredibly cheap cash flow' play (and that one had a big juciy NOL too) and have no desire to repeat the experience. And the 100 years of profit rings pretty hollow to my ears - you can make the same sorts of claims with GPC and they've been going down a hole for years. And - again, no offense - I'd NEVER buy a stock because something thinks a takeover will happen. What if it doesn't? What then? If they don't buy shares, who is gonna care anyway...cash flow isn't that highly prized these days for whatever reason, so why will the sun come out on this one? After all, my impression is that this is a low margin debt heavy cyclical. Hardly an opportunity to excite anyone but a deep value investor, and I have no temptation to join that camp.

    SubjectWrong Impression
    Entry09/01/2000 12:52 AM
    Membermichael99
    Just checking in. Working on something else now, but evidently you've rocked the rating downward - was it a 4? Don't look at the first six months. Look into the future. They increased sales 60% by buying a poorly managed business. Plus, the biz is seasonal and things do come through late in the fiscal year. All those assets go on the balance sheet at the beginning of the year. It takes time to squeeze the working capital. I've spent a lot of time on this one, and know things you evidently don't. I just don't have time to go through all of these things. Jim, if you're reading this, I'll get to your questions hopefully tomorrow. They have answers. Same with Dan. I just don't have the time or motivation to take the time to explain it now. Maybe some of it will come out when I respond to Jim and Dan. 100+ years of profit in a low-single digit margin business shouldn't ring hollow. You should ask how and investigate. Just sit back and watch what happens in the next year or two. Mike

    SubjectRe: mike99
    Entry09/01/2000 10:01 AM
    MemberSpocksBrainX
    If you make money and people rate it poorly, who cares? If you don't make money and people rate it highly, who cares? If HBP goes up then I'll be thrilled for you. If HBP goes up, it won't bother me -- I don't own it, so what happens to it doesn't concern me. What I tried to do is look at your note and see if I came out with the same conclusion. I didn't, that's all. That doesn't mean I'm right or wrong (at this point), but it does give you one (otherwise meaningless) opinion. After all, I don't know you, you don't know me, I don't know your record, and you don't know my record. Regardless, good luck with you investment. If you would like, if I see your name on another post I won't exercise my free right to express an otherwise worthless rating. That ok with you? No answer is required.

    SubjectA last thing
    Entry09/01/2000 10:11 AM
    MemberSpocksBrainX
    If it matters (and, of course, it shouldn't!), this is the part I am esp. doubtful about: "Once the Rugby Group shares are on the market, look for a buyout of Huttig. The buyout could come from inside (management) and a private market valuation based on recent activity places the shares at a worth over $12-15/share. Again, the Chairman is a shareholder steward - Crane investment arm still has an investment in Huttig - and would not let the takeout go through much lower than private market value. I'm looking for action within the next year." Within the next YEAR? How can you say this - unless management told you specifically this. I thought value investors didn't make specific time and price prediction of this sort. Did they say this when you talked to them?

    Subjectdan32 good Q's
    Entry09/01/2000 12:58 PM
    Membermichael99
    The 15M is cumulative, but they are ahead of schedule on getting there. I've explored this issue regarding one-steps and two-steps. Basically, there are geographic and market limitations to a conversion. Huttig relies on relationships (that's a good thing/barrier) and reputation, so when it acquires businesses, it makes sure it can do right for itself and the market. In other words it can't step on toes too much by being pushy with conversions. Most of the operations on the market are one-steps, however, and I expect as Huttig starts executing its acquisition strategy that a greater portion of their ops will be one-steps. Re: acquisitions, Huttig turns inventories/works capital tremendously better than its competition. This means it can acquire a company for an apparently good price for the seller, then make a company more valuable by applying Huttig's processes to it. With the very large Rugby acquisition, they are taking inventory turns from mid single digits to mid teens. That squeezes cash right out of working capital and effectively lowers the price paid for the acquisition. Competitors. One was Morgan, which I’ve talked about and was just acquired by Andersen. Other companies that compete in the area are Cameron Ashley Building Products (CAB) was taken private by management in June at 18.25/share (an offer that was ultimately increased from 15.10, and in the end represented EV about 9X EBITDA, but was not nearly as good a business, turning inventory 50% less well than Huttig). So since the annual, two major ones have been acquired and are not easily followed. In Canada, there is an Emco (EMLTF), but it is limited to Canada. Noland (NOLD) is comparable but doesn’t compete directly (it’s in plumbing and different products). Kevco (KVCO) works in a different industry segment. Building Materials Holdings is a better comparison, and a competitor, but not as efficient. Huttig is an extremely fragmented industry populated by practical mom-and-pops, and Huttig is the largest, most efficient player and getting stronger all the time. In this type of business, the bigger the stronger if efficiency is the focus. Mike

    Subjectjim77 great Q's
    Entry09/01/2000 01:26 PM
    Membermichael99
    Jim, you're a star. Don't know who you are, but I would guess you're working in the biz. BTW, on ACAS, re: tax issue, I was just implying it is best in tax advantaged accounts, and I otherwise agree with you, though I'll wait for the next "crash" to pick up mine. Let's go through your Q's 1) No Steve Brown at Huttig HQ. Having Huttig management corrupted by Rugby brass is a worry that should not be a worry. Won't happen. 2) Klarman is a big buyer after the spin-off. Very big. You forgot Price, who also has been a decent buyer. Gabelli and the rest may have got their shares from Crane - it's hard to tell. Crane itself is a quality organization, and value investors are attracted to it. Ruane just bought Dover, which is like Crane. I believe he got the shares in the spin-off, but not sure whether the position has been changed at all. 3) Rugby is a committed, price-insensitive seller. Though I suspect Klarman or Price may want to privately negotiate a purchase of some of the shares. Klarman may have already done it that way, because he has acquired big chunks with little traded volume. Rugby can sell 20% right now without restriction. And they are probably selling right now. 4) Boilerplate on the environmental risks. Impact minor if ever, and not known to be a major problem. 5) Andersen was about half of the window sales. Window sales make up about 14% of total sales. The Andersen biz was low-margin and difficult. The 100% exit by Andersen came sooner than expected, but was indeed expected once Andersen acquired Morgan. Doors are a much more profitable business, and Huttig is basically getting a lot of door business now thanks to Morgan's exit. Still expecting low-mid 30M in free cash flow. Debt reduction still on target. One thing: windows were big in the winter, which moves the seasonality up from strongest in 4thQ to strongest in 3rd-4th transition period. In the long-term, sales will be fine and cash flow will be better. 7) Market is anticipated to grow. While in good times pressure builds to get rid of the middle man, in bad times this pressure is relieved as people like the middle man. The cycle is why the distributor exists. Home Depot has a fine-tuned model that doesn't need excess baggage, and Huttig considers Home Depot a customer. 8) CAB was bought out by management for an EV/EBITDA of 9. And that business wasn't so good. Competitive margins but mediocre turns. Management ended up upping the bid from 15.10 to 18.25. Huttig's chairman comes from Crane, which owns a large chunk of Huttig Shares in its Crane Fund. The chairman is also very shareholder-oriented and known to be ethical in this regard. If there is a buyout, I'd see at least 10, but as high as 15. That's if it happens within a year. If it happens. This is a very good business that is rock-bottom cheap with several indications both within the industry and with company actions that mimic preludes to buyouts in times gone by. There are rumblings of a strategic outside buyout as well. But those are very low rumblings. It's a good one to hold even if the buyout doesn't occur - it is the consolidator in an industry where size is king. Give me a few years, and I might buy it out. Mike

    Subjecta few more points
    Entry09/01/2000 02:40 PM
    Membermichael99
    I would just comment on the seasonality and cyclicality. August, September, October should be the strongest months now, especially with a falloff in windows and jump in doors. Going off the first six calendar months is not the way to value these shares. This is a cyclical business. But distributors exist because of cycles - the cycles protect them from would-be competitors such as HD. When a business such as this has 130 straight years of profits despite the thinnest of margins, it should spawn a question of why. I've explored a lot of what makes this a special investment with a margin of safety and significant upside. When a distributor whose function in the food chain is to carry inventory can turn that inventory nearly as well as Wal-Mart, that should turn heads. Much like Wal-Mart at one point, Huttig is the largest, most efficient beast in a business populated by mom-and-pops. There is no doubt it is boring, and is not sparkling or shiny. The average investor will miss this one. Even good investors will miss this one. A very very good investor pointed it out to me. But I still read the proxy, 10K, and such and said, "so?" There has to be an understanding of Huttig's sustainable competitive advantage into the future, an understanding of low-margin business economics, and an understanding of what Klarman (owns 19% of float) and Price bring to the party in terms of insight and action. These shares appear very attractive whether or not it is bought out, IMO. Mike

    SubjectA peace offering
    Entry09/01/2000 05:40 PM
    MemberSpocksBrainX
    If it matters (does to me), we've gotten off on the wrong foot. I was hoping that by giving myself a title like 'blind fool' you'd understand that I was acknowledging my own limitations with your idea. Please also understand that as an auditor for nuclear submarines for a decade the 'negative' approach is engraved in my soul. My job was to find fault. Your note was well written, and your logic is well thought out. My only real 'problem' (and I use that term lightly) is with the obscurity of the idea (since I'm not in a position to delve into the cold and dirty facts of the matter), but that's a personal issue with me. I'd rather have instant gratification with my ideas (if possible). Perhaps that's an underlying purpose of this odd creation - to bring some light to the obscure? Who knows. Regardless, I wish you great success here and with your other investments.

    Subjectof course
    Entry09/01/2000 07:55 PM
    Membermichael99
    Actually, last night it was late and I was tired, and I just saw the rating slashed and it didn't make sense (8 people with 7's or 8's then a 5) and I guess I took it personally. Then I saw the title of your post and without thinking assumed it was aimed at me. In the light of the morning and some much-needed sleep, I see I overreacted. My sincere apologies. BTW, my practice is that if it appears someone put thought into a post, to await a response to my Q's before rating it. Of course, that's not how everybody does it, and I don't deny it is a free right to rate. Mike

    SubjectOn the ratings
    Entry09/01/2000 10:05 PM
    MemberSpocksBrainX
    To be candid, I give them little thought. I rated your idea a '5' only because I usually put that rating on for the vast majority of stocks I see here. I don't understand most of them (I count the industry groups I do understand as 1, 2, 3, that's it), so that's how I react. Call it a neutral rating. In hindsight, I ought to rate them only if I DO understand them. But the rating has no time limit attached, so I consider them of little importance. I think I'll hold off in the future. I would suggest - if the board gods are reading this - that any sort of helpful definition for the 'ratings' might be appropriate. I do try to post on any idea that I think is well written and interesting. I also try to put a negative slant on all the ideas that I post too along with the positive. FWIW, my approach is based on finding the 'obvious' winner, which probably means I don't exactly fit in here. In keeping with that theme, I'd be much more interested in your idea a YEAR from now when I've seen the things you say will happen actually DO happen. I'm leery of anything involving an acquisition, having had a few bad experiences in that area. Clearly personal experiences impact how we see every idea around us. I just want to beat the SP500....

    Subjectbeating the S&P
    Entry09/01/2000 10:45 PM
    Membermichael99
    That should be every investor's goal, since replicating it is so easy (call vanguard). I keep a portfolio of 15 stocks or so. This is one of them, and to me at least it's an obvious winner. I've been buying shares for the last few weeks, even today. The more I find out, the more I want to own. But I think people naturally trust home-grown ideas the most. "Obvious" is very relative, so I hope to see you keep posting. Mike

    Subjectcouple things
    Entry09/02/2000 12:33 PM
    MemberSpocksBrainX
    -and you can also buy SPY, which also gets you the index -Initially I try to buy once and then generally not buy again unless something materially changes in the story. That way, you let the company demonstate it is worthy of further funds. Once I know a company like the back of your hand, then you can add funds anytime. I started doing this with my stocks after I bot a few and what I expected to happen didn't. Just curious...how long have you followed HBP?

    Subjectspin-off
    Entry09/02/2000 04:15 PM
    Membermichael99
    I've followed it since the spin-off last December, but didn't "get it" till I got the annual report and then did some talking with some key people. I know this one as well as any company right now. I'm pretty pushy when I talk to people, and I haven't learned much to disappoint. Actually, more I learn, more I buy. I generally don't have a proving time. Like with Caterpillar, if one waits for the juicy stuff to get out, the price is much higher. I just try to find the juicy stuff before I buy. If it's not juicy, I don't buy. My next pick will demonstrate my tendencies in this regard. Mike Mike

    Subject
    Entry09/02/2000 06:50 PM
    MemberVIC
    Ratings Definitions - there have been some questions on this string about ratings definitions. A definition of each rating should appear in a text box under the ratings as well as in a "roll-over" next to the cursor. If they do not, please contact me via the button at the top of the page with the name of browser and release/version used (found under Help menu, about Communicator or about Explorer) so i can get this issue fixed. A definition of the ratings is as follows: 10 - Best idea in 3 years 9 - Best idea this year 8 - Top 3 or 4 ideas this year 7 - Top 5 or 10 ideas this year 6 - Above average idea 5 - Average idea 4 - Underperform mkt slightly 3 - Underperform mkt by 20% with more risk 2 - Underperform mkt significantly with more risk 1 - Horrible idea, how was this member admitted? As you see, the scale is not linear. Because members only submit a limited number of ideas a year (and if VIC does a good job of screening), most ideas will probably be a "6". Given the definitions, theoretically, no member should rank more than 10 ideas at 7 or above per year. Hope this helps.

    SubjectBoard gods - ratings
    Entry09/02/2000 08:50 PM
    MemberSpocksBrainX
    I see those things too, but there's no time limit attached. For example, I think HOTT is a GREAT idea for the next 6 months or so (I'm biased, clearly, but in this limited area I think I generally know what I'm talking about) - as long as SSS continue to move ahead - but for 3 years I wouldn't necessarily recommend it. This HBP idea - and many, many of the ideas here - are probably better long term ideas than short term ideas. Timing makes all the difference. Are we talking about 'core' ideas or trading ideas? I for one don't want to be insensitive to how long it takes to get results. I suspect - and this is just a personal opinion - that we will OVERRATE the ideas on this board. I have lots of reasons for thinking that way, but I doubt if few would be interested. FWIW, if you trying to limit emotionalisms in this board, you couldn't have come up with a worse rating than what you listed for '1'. There's no reason to include an inflammatory comment like 'how was this member admitted'. Just an opinion

    SubjectWe differ, of course
    Entry09/02/2000 09:00 PM
    MemberSpocksBrainX
    I've always gotten my best ideas from companies with high top line growth, so that's how I 'define' juicy. One small advantage to an approach like that is that when results are good people generally notice. They 'overnotice', actually. In my limited experience, it is hard to get an expanded PE ratio in an otherwise obscure situation. You WANT it to be noticed. Again, I want instant gratification. I don't want a catalyst to be simply that it is 'cheap', as I'm not willing to hold something that doesn't move for an extended period of time. I belive that Peter Lynch, who I've modelled myself after, operated in this basis. You know, the 'time efficient method' of investing capital. In some respects, a value based 'invest in what you know' momentum approach. Just curious...have you looked at M&F Worldwide on this board? Similiar idea, IMO. High cash flow relative to the market cap, and that one has a big NOL.

    SubjectValuing Cyclicals
    Entry09/03/2000 06:33 PM
    Memberphil144
    Looks really interesting but... This is obviously a cyclical company. A $200 million EV looks really low compared to a $60m EBITDA, but the multiple on trough earnings will turn out to be very high. It's awfully tough to value stocks like this. Any thoughts?

    SubjectRead the prior messages
    Entry09/04/2000 03:24 AM
    Membermichael99
    Cyclical but 130 years without a losing year. A plant manager says sales only really fall about 10% during bad times. In addition to tremendous working capital management, this may be a reason why the company has been able to stay profitable through thick and thin. We're looking at 30-35M free cash flow this year, per the company. Very low fixed costs - distribution centers are just a warehouse with small office and small fleet of leased trucks. High asset turns/inventory turns. These are the things that are atypical for a "typical" cyclical. Mike

    SubjectInteresting
    Entry09/04/2000 07:54 PM
    MemberSpocksBrainX
    Just an aside...based on this entire exchange I'm going to take the brief amount of time needed to explain my rating whenever I post it. If this board is truly going to be a help to anyone (I would assume that might be a purpose of the board?), then simply planting the rating and moving on isn't going to tell us much of anything. Just curious....did you ask management how they define 'free cash flow'. Sounds absurd, but I've gotten some pretty looney answers from time to time.

    SubjectIf it matters
    Entry09/04/2000 08:31 PM
    MemberSpocksBrainX
    I did ask some very basic questions in my blind fool post that you could answer with very basic sentences if you have the time. If not, that's ok too!

    Subjectanswers
    Entry09/04/2000 10:51 PM
    Membermichael99
    Re: free cash flow, as I've said, it is seasonal - second half, and that's where they pay down debt too. They assure me of the numbers I've said. As I said, the Andersen deal knocks the expected FCF down from 35ish to maybe the low 30's, but still looking at above 30, and in the long-run, growth on this measure because of reasons I already described. Management is looking to be a consolidator, using their operations advantage as I've described. Two things facilitate this: lower debt and more cash. A buyback doesn't advance that goal. Remember sales are about 1.2 billion, so commodity fluctuation affecting sales by 1% is not a big worry. Again, the history means something here, and lumber/commodity fluctuation is something that is built into their strategic planning - and has proven successful. You may not believe 130 years without a loss in this type of industry is head-turning, but it does support the company's success on this point. Management is very honest, and not prone to positive hyperbole. This is not a PR factory. Call the company and ask for IR, and you'll get transferred to HR. Management is just a conservative bunch. When they give targets, expect them to be surpassed. When they give downside, expect it not to be hit. Again, this is a cyclical industry, but homebuilding slowing does not kill this company. Note that they say their targets are on plan re: cash flow and profitability improvements despite the anticipated slowdown. And remember the exit of the big door distributor - sales declines over the next few years will be offset by market share gains here. As far as buying a stock because I think a takeover will happen, I think I've made a case that it is a good stock to own even if one doesn't happen. And whether cash flow is highly prized by others or not at this point in time does not affect my investment decisions. In the long run, it is all that matters. In summary, the impression of low margin is right, but it is corrected with Wal-Mart like turns. And as I've said, the danger with low margins usually lay in high fixed costs and susceptibility to large losses during downturns. Low margins can be good business, as Wal-Mart demonstrates, with great asset management. Low margins can be an advantage because they do not invite competition or capital into the industry. The impression of debt-heavy is really only relevant if there is a risk of default. There really isn't. In fact, by the end of this year, with debt at 82 million, debt will be paid off out of just over 2 years free cash flow. Interest coverage is therefore high. Cyclical, well, that's been addressed. Whether or not you wish to agree with my arguments thus presented is up to you. Probably only deep value investors will appreciate this one, but you imply deep value investors don't enjoy profitable runs. I feel such investors enjoy the most consistent success. Mike

    Subjectfree cash flow
    Entry09/04/2000 10:59 PM
    Membermichael99
    Actually, I did not ask, but I use a Stern & Stewart-type definition, and they profess to using S&S's EVA. As far as numbers, they confirm my assumptions and conclusions rather than presenting them to me de novo, so it appears they are using my definitions. Mike

    SubjectLast note -
    Entry09/05/2000 09:06 AM
    MemberSpocksBrainX
    Thanks for the reply. As far as the final comment, I'm pretty much in the camp of whatever works for ya is good enough for me. I know what works for me, and that's the ONLY thing my clients care about. If it matters, of the 6 things I've mentioned here, one is up 100% (and I have mentioned over and over again that it was my best idea), another up 45%, so I'm comfortable enough with my own technique. Candidly, I don't accept the logic in not buying shares, but that's my own opinion and not important in your decision (obviously!).

    Subject
    Entry09/05/2000 12:47 PM
    Memberhoward7
    Mike, A well researched and thought out idea. I expect to give it a deeper look. The only thought I would pass along on the Wal-Mart analogy with low margin business is that Wal Mart not only has the expertise of squeezing out every last penny of cost in getting product out on their selling floor but they have the clout to bully their vendors too. They have been consistently increasing the number of vendor financed departments throughout their stores. Not everyone can tell their vendors that they won't get paid until after the product is sold. Just a thought. Don't concern yourself with the rating numbers you receive as, from the various comments I've read, there is a wide variance in the level of expectation. Seems that lots of folks are looking for sex and sizzle here too and ratings may well be based on what the next quarter's numbers are expected to be. The effort you have put into your research is impresive. Good job!!!

    SubjectAgree - a last (final!) though
    Entry09/05/2000 02:30 PM
    MemberSpocksBrainX
    You said, "Don't concern yourself with the rating numbers you receive as, from the various comments I've read, there is a wide variance in the level of expectation. Seems that lots of folks are looking for sex and sizzle here too and ratings may well be based on what the next quarter's numbers are expected to be." From what I see the opposite is mostly true. There are a majority of asset plays - cash flow plays, in essence - in this listing. I haven't taken the time to categorize them yet, but fast growers aren't the norm here. That's hardly surprising given the name of this club and the founder's description of what is wanted here. That said, I find it curious why the inclusion of 'sex and sizzle' (nicely put!) is such a bad thing for a value investor of any type to want. The more exiciting the catalyst, the more exciting the stock, perhaps.

    SubjectOne last last thing
    Entry09/05/2000 02:33 PM
    MemberSpocksBrainX
    I think the board gods could do us an interesting service by keeping track on what the actual performance of many of these picks have been. Based on my unscientific survey, the top performers so far (excluding ECP which got a takeover bid, which is a big suggestion for most of our ideas) have been those with high top line growth (AEOS is the most striking example). Combine top line growth with a value entry can lead to dynamic things... Will be interesting to keep track...

    Subject
    Entry09/05/2000 02:53 PM
    Memberhoward7
    A matter of definition. Thats why there are markets.

    Subject?
    Entry09/05/2000 03:26 PM
    MemberSpocksBrainX
    I have no idea what you mean, but that's ok! The board gods have spoken - congrats!

    SubjectTaking Account of Both the Goo
    Entry09/05/2000 04:43 PM
    Memberphil144
    You can get a good idea of how cyclical a business is by asking how often the consumer buys the product. How often do people buy windows or doors? It sure isn't every day like milk. Since it's cyclical, Huttig should be valued based not on one year's earnings but on some average of the good years, middling years, and bad years. Benjamin Graham said that this was a difficult exercise to do, and he was right. A 10% decline in sales could lead to a much greater effect on profits.

    SubjectThat would be an interesting t
    Entry09/05/2000 04:52 PM
    MemberSpocksBrainX
    Since HBP is - in effect - a bad new company with this new acquisition. The Rugby thingie was a big chunk, so how you are going to go about estimating anything is beyond me, unless you are apt to accept managment's estimates and go from there. I still don't get it, though I'm trying VERY hard to do so. There are some pretty fancy track records behind this board so if they saw this as this board's 'top pick' then obviously somebody in the know is EXTREMELY impressed. I only mention those folks since they have a record and nobody else has that we know about. For me, I guess I'm just unbelievably dense. I see this in the 10Q and wonder why it isn't an issue: "Excluding sales attributable to acquisitions in 1999 and branches which were closed or are consolidating, same branch sales decreased by approximately 5% from the comparable prior year period. This decrease is primarily attributable to deflation in the commodity wood market which is believed to have negatively impacted sales in the second quarter of 2000 by approximately $12 million compared to last year." In other words, the 'core' business experience NEGATIVE growth. I've been assured that this isn't a big deal - wood deflation isn't going to be an issue since the sales are so huge hear - but I can't accept that simply because somebody says it is so. I don't mind cash flow stories, but why is everyone so excited about this?

    SubjectI'd give my life for a spell c
    Entry09/05/2000 04:53 PM
    MemberSpocksBrainX
    I'm half blind in proofing my own copy...

    SubjectHmmm...
    Entry09/05/2000 05:03 PM
    Membermichael99
    My feeling is that the 130 years of no losses isn't ringing a bell for you like it did for me. With high asset turns/inventory turns and, as another poster pointed out, very low PPE, this is not a heavy industrial. Its fixed costs are low - and high fixed costs are the real problem behind cyclicals. Variable costs shrink as sales shrink. Huttig buys from wholesalers and sells to end-users, but it only holds that inventory somewhere around 22 days (again, can't use this year, because they are still squeezing Rugby). Given all this, a sales decline of 10% isn't so bad - and doesn't lead to losses. As far as valuing cyclicals, the big deal is when big profits need to be averaged against big losses. Huttig's at about EV/FCF of 5. And losses are not going to be an issue, let alone big ones. Lower profits maybe, but this gets back to the low PPE, etc. discussed above and in other posts. The profit falloff just should not be expected to be that dramatic. Sure, I can admit that EV/FCF of 5 is on probably peak FCF, but given the muted cyclicality of Huttig, that's still very cheap. There is some counter-cyclicality just in the business, too. When people can't afford to buy new houses and starts slow, people tend to remodel more. Huttig is big in both markets. Mike

    SubjectPlease understand me Mike
    Entry09/05/2000 05:03 PM
    MemberSpocksBrainX
    My most succesful area by far is retail, and after looking at your idea it isn't tough to put it right in my camp. They are distributors, pure and simple, which isn't that much different than a simple retailer. In retail, I've been trained to run hard when SSS (unless the thing gets so absurdly cheap that it is time to look anyway) come in negative. At the very least, having them has to raise some very hard questions. I know you think this is dirt cheap, but the cynic in me can't help but notice you've already modified your cash flow expectations, and not in a positive direction.

    Subjecthmmm....II
    Entry09/05/2000 05:09 PM
    Membermichael99
    I'd say it is a bit different than retail. Distributors exist because of cycles, retail exists despite cycles. My free cash flow expectations were 35M. Last I heard from Huttig, when I said "low-mid" 30's, I got confirmation. If they're modified, it is not by very much. The point I've had to pound home more than any other here is that the effect of the cylclicality can be muted by high asset turns and low fixed costs. I'll try not to mention it again, if the question doesn't keep getting brought up. I'd like to thank those on this thread - yes, even you paul118 - that helped me expound on the idea more - I'm sure that contributed to the win. I guess I should expect a few people to come in and disagree without reading all 30-odd messages. After all, it's not sexy - even the name is ugly. All I can say is, consider reading them. There's more information there than I've put publicly anywhere else. Mike

    Subjecton that 100 year bit
    Entry09/05/2000 05:10 PM
    MemberSpocksBrainX
    Ever read Charles Allmon? He still does a monthly column in Better Investing, the NAIC rag which I still read each and every month, and his columns are filled with the long termers ala GPC. His ideas has stunk it up. This might be a function of a value hating market, but some of it is due to these companies facing far more challenges than they ever did before. GPC is such a classic case. In retail, I'm set on a 12 month cycle. Anything before that is past history. See Gap for an example...

    SubjectEven me?
    Entry09/05/2000 05:17 PM
    MemberSpocksBrainX
    Boards like this don't come alive without people like me. Otherwise, we 'all be buddies buddies buddies', and that's no way to invest. You need somebody to challenge every assumption made, and many of these posts contain factual errors. I NEVER believe management unless reality backs it up. Did they tell you about the charge? Nope. No, they probably didn't know about it then, but that's something to file. Peter Lynch said, 'Before buying a stock, I like to be able to give a 2 minute monologue that covers the reasons I'm interested in it, what has to happen for the company to suceed, and the pitfalls that stand in its path'. How many people - on this board and elsewhere - do that last bit? I'm outta here.....I've had enough even of myself, and that's saying something. Compound that 10k into a mill, ok?

    SubjectMain Competitor
    Entry09/05/2000 05:36 PM
    Memberjim77
    Mike, congtatulations! I thought from the beginning Hutiig was the horse to beat. I entered 2 horses in this contest and I would have bet that Acas would be in the money...but my other entry, Dutchfork, was the one that placed! Who can figure...but I'm not complaining. I plan on digging deeper into this one...if they ever get around to sending me the info! Paul, I agree...you make this sight a whole lot better. We need squeaky wheels to keep everybody honest. Could you please list all of your ideas on the sight and tell me what you were referring to with regards to the track record of the founders of this sight? I don't have a clue who's behind VIC...as I just was recently invited over here.

    SubjectThat was supposed to be my las
    Entry09/05/2000 06:14 PM
    MemberSpocksBrainX
    You can sort by several things, not just symbol, so you can find anybody's ideas that way. On MSN Joel Greenblatt introduced this club, recommended Buckle among other picks, and is - I think - one of the Bubbas behind this site, if not THE Bubba. As his book 'You can Be a Stock Market Genius (Even if you're not too smart)' (one of, if not THE, worst title I've EVER seen) shows, his partnership Gotham Capital achieved a 50% return from 85 to end of 94, when they apparently gave up the biz and invested privately. The only catch on this record is this is that it apparently is before the general partner's incentive allocation, which if this was a hedge fund as we know it - could have been a mighty big chunk. As an aside, one of the amusing things about about Warren Buffett is his knock on mutual fund expenses while he neglects to mention his 20% from the hedge fund days. I'd kill for compensation like that.

    Subjectjim....
    Entry09/05/2000 06:17 PM
    MemberSpocksBrainX
    You were the one who mentioned the ivy league educations in your ACAS post, which had me reaching for smelling salts....I managed to hold off....after all, the late Charles Steadman of the Steadman funds was an Ivy league grad too and look where that got him...

    Subject
    Entry09/05/2000 06:20 PM
    Memberhoward7
    I mean that you could the two greatest value investors right next to each other and they will probably come up with very different portfolios. We all define value differently, we all have different methodology for determining what we call value, and we all have different tolerances and levels of patience. Either an idea appeals to you or you go on to the next.

    SubjectBut that's not what I asked
    Entry09/05/2000 06:35 PM
    MemberSpocksBrainX
    You implied that 'sex appeal' was somehow bad. And I thought that 'value' investor was an oxymoron (you know, the Buffett quote about growth and value being joined at the hip). me, I just want the sucker to go up. I like Lynch's crayon idea too...

    SubjectPaul
    Entry09/06/2000 03:54 PM
    Memberjim77
    Re: Acas management bio...I hope you read the whole paragraph before using the smelling salts!

    SubjectIt isn't my area
    Entry09/06/2000 10:36 PM
    MemberSpocksBrainX
    Your ACAS idea is incredibly complicated, and would possibly take me years to understand. Perhaps I don't have the educational background required, eh? I prefer the incredibly simple idea to the grand, complicated ones. In many ways, that little figure up there - you know, the old guy with pages and pages and pages - represents the total antithesis of what I believe in. Whatever works for ya!

    SubjectPhilosophy
    Entry09/12/2000 06:53 PM
    Membermichael7
    HBP is a good solid investment. Probably, over a few years, it will solidly outperform the S&P 500. But is it the BEST value investment out there? I have to agree with he person who said that without a good catalyst he doesn't want to invest, and that merely being undervalued isn't enough of a catalyst. HBP is the kind of company that could sit around being undervalued for years. It's too boring of a company for anyone to get excited about it. Furthermore, it's really easy to find value in the building materials sector. Until the sector gains momentum, HBP isn't going anywhere. I liked best the Elder Beerman (EBSC) stores idea. The author of the idea pointed out that there was a new board of directors coming in. And sure enough, the company already announced a self-tender offer for 22% of the stock, and the price has gone up. I'm solidly in the black on that investment after a very short period of time. I've tried to post my best investments, but they seem to have been ignored and/or misunderstood by most of the other members of this club. I guess in the future I'll keep my best investments to myself and post more traditional value picks.

    Subjectlittle comments
    Entry09/12/2000 08:14 PM
    MemberSpocksBrainX
    -HBP is up 10% since this poster listed it. Another sneeze -- and a 1/2 point rise -- and it will be up 20%. I don't know why it will do that but a case has been made here. Ironically, I wouldn't be caught dead in that EBSC idea, cause it looks like a badly sinking ship to me. That didn't stop you from making money on it. -Regarding people ignoring your ideas, some famous guy said this: "It's when you decided to inest on your own that you ought to try going it alone. That means ignoring the hot tips, the recommedations from brokerage houses, and the latest 'can't miss' suggestions from your favorite newsletter - in favor of you own research." Of course, you owe yourself to objectively measure those results too to make sure good intentions are yielding good results. Another famous guy said this too: "You aren't right because a majority of people believe what you do. You aren't wrong because a majority of people disagree with you." Post your best investments, if you will! If you get ignored, who really gives a rip? How did you do, and how is your record - that's what really counts, PERIOD. Just an opinion.

    Subjectkeep posting
    Entry09/13/2000 01:12 AM
    Membermichael99
    It is somewhat ironic that this HBP, which IS a boring-appearing company (but anything but - a very unique animal) - is also very much discussed here. In fact, the most-discussed. It appears the sheer ugliness of it raised a few hackles. Meanwhile, other companies that are a bit shiny and noteworthy are less-discussed. What makes for that? Not sure myself - if HBP were so boring and plain jane, then it would not seem it should not be so popular as a discussion topic. There were layers to untangle that I didn't reveal in my original post - and several layers remain unrevealed. Maybe the key is in how revealing - or unreavealing - the initial post is, and to what degree the follow-up posts reveal the entire story. As long as there is more of a story to be told, the thread should grow - and be more interesting. To me, HBP is my best idea out there. Oops - just lost some respect maybe in the short term, but time will tell. I certainly hope you don't stop posting your best ideas. I for one would wish to see more of your best ideas, however non-traditional. Mike

    SubjectHonestly, my final note
    Entry09/13/2000 05:42 PM
    MemberSpocksBrainX
    "It is somewhat ironic that this HBP, which IS a boring-appearing company (but anything but - a very unique animal) - is also very much discussed here." It has the most posts in major part due to me, in trying to understand why people found it so interesting to rate it so highly. If it matters, I don't see much of any further exploration of the basic idea - I asked some very simple questions in my original post which you either never saw fit to answer (I don't have a problem with that!) or simply brushed off. No new information was added. Clearly others might feel differently, but that's how I see it. HBP's core business experienced negative same store sales last quarter, saw a likely reduction in cash flow due to loss of the distributor agreement, and warned of future results. I don't see this as a good thing, and I don't see why anybody would suggest that with all these issues this stock would be their best idea. But that's my opinion, and again - since I don't own this stock, the discussion is irrelevant and so is my opinion. In my view, the best idea is the one that can be instantly understood and appreciated by anybody that comes across it with an open mind. But again, that's just an opinion, and there are enough irrelevancies in my posts to water down any discussion.

    Subject?s
    Entry09/13/2000 07:12 PM
    Membermichael99
    You sure like to stir things up. I believe I answered your issues - I did so point by point. Many people don't like the stock - that's why it's down. So you're in good company. Not sure what else to say. If there are new issues, I'm happy to address them. Re: ideas that are easily understood by anybody - they're the most dangerous in my opinion. Mike

    SubjectQuestions and Comments
    Entry09/14/2000 02:57 PM
    Memberjim77
    Mike... After reading the Huttig investor packet and rereading your comments on this board...I have a few questions. (The quoted remarks are your statements from prior messages). (1) "Free cash flow jumps to at least $30M-$35M this year". Could you explain what you mean by 'free cash flow'? My definition is cash flow from operations minus cap-ex...and based on that definition it would require blow-out numbers from Huttig in the second half to make those 'free-cash flow' projections. Is it doable?...and if so, can you walk me through how most of the "free cash flow comes in the fourth quarter in this business"? (2) "Remember sales are about $1.2 billion, so commodity fluctuations affecting sales by 1% is not a big worry". The 10Q stated 'branch sales decreased by approximately 5% from the comparable prior year period. This decrease is primarily attributable to deflation in the commodity wood market...impacting 2nd quarter sales by $12M'. The company estimated that lower lumber prices penalized profits by $2.5M or ($0.07 per share). A relatively small decrease in sales appears to have had a much larger impact on the bottom line. So when you stated that "sales only fall 10% during a recession"...how much of an impact would that have on the bottom line? (I know they've had a 115 years of profits through 'good and bad times', but for a hundred of those years they were a tiny little company...and are vastly different going forward). (3) "This is a very good business that is rock-bottom cheap with several indications both within the industry and with company actions that mimic preludes to buyouts in times gone by". You have alluded to this being an LBO candidate on this site (and the MSN site) but haven't given us a great deal to go on. Is it strictly because the company is so cheap or are there other indicators? (The Andersen Window press release was a very thin reed to base a buyout on). Is this management more Machiavellian than most? The HBP info I received in the mail contained numerous statements such as "the KEY measure of our success is the stock price"...."Our number one goal is to drive up the stock price".....and "Huttig's number one 'Strategic Objective' is 'increasing the stock price'. Have they made these claims early in the year...knowing full well that they had every intention of buying this cheaply from shareholders down the road? After one year as a 'stand-alone' entity with a languishing stock price...do they approach existing shareholders and claim the only way to achieve their '#1 goal of a higher stock price' is to take the company private? (4) "There were layers to untangle that I didn't reveal in my original post...and several layers remain unrevealed" Contained in the HBP info were two identical writeups from Dr. Mike, so there is no question that you have access to the 'powers that be'...and yet you still feel strongly that the insiders are downplaying this one to buy it on the cheap. Building a good story is one thing but how about now letting it all hang out. Mike, I already started buying this one (because it's just TOO cheap) but I, for one, would also be very interested in hearing more about 'the layers yet unrevealed'! Jim

    Subjectsee note 9 - not meaning to 's
    Entry09/14/2000 10:43 PM
    MemberSpocksBrainX
    Your questions have apparently been answered since I asked virtually the identical things in note 9. Mike said he answered me, in depth I assume (?). For goodness sake, I'm not trying to stir up ANYTHING, and frankly I don't care for the inference and I don't understand it. These are real issues that ought to be answered. I guess I'm frustrated, that's all. I like the approach taken by peter140's new VCI idea - it seems to me to be a reasoned way of presenting an idea, with both the positive and the negative in equal measure. It also invites commentary on the negative side without getting emotions involved. That's all.

    SubjectQ&A
    Entry09/15/2000 12:31 AM
    Membermichael99
    Jim, I asked the company about low-mid 30's FCF (my estimate) and they confirmed it. My definition of FCF is operating cash flow less maintenance cap ex, but I do adjust how I include net working capital changes in operating cash flow based on the growth characteristics of the company. I also adjust A&D to reflect reality, and I'll often use Stewart's QFV methods to confirm I'm in the ballpark. Re: seasonality, as I mentioned earlier, with the loss of windows and increasing door business, the seasonality is being shifted a bit earlier by about a month. The fourth quarter will be less strong, and the third more strong. My sense is the two final quarters will be more equivalent now. Basically, this is a two-quarter business when it comes to cash flow. The good news is the door business is higher margin, and even if this year is hit a bit by Andersen's exit, the margin improvement and increased doors/replacement windows suppliers should shore things up by next year at the bottom line. The 10% figure comes from a company source at the distribution level, and it is expected that it will have an impact. But their costs are largely variable - they aren't a manufacturer - so the impact will be minimized. As you know, when commodity fluctuations are the issue, they tend to even out in the very long run (as with foreign currency issues). I don't concern myself with them. Certain people of course will. Re: the emphasis on stock prices, remember that management are EVA fans, and that method assumes efficient markets will recognize economic value created in the stock price. That's where it comes from. Management is well aware that with Rugby selling that the stock is fighting a headwind for a bit. Literally, we have a bully holding the head underwater here. Re: additional layers, give me a break here. I'm just opening a fund, and I haven't had a chance to buy there yet. I almost regret posting as much as I have because I just heard from one fund manager that he was in another fund manager's office and my write-ups on HBP were on the desk. Now I find myself praying that Rugby just starts dumping so that any rush to buy is only mutedly reflected in the price. Luckily, this is an ugly and boring stock. Are you saying that HBP is sending my write-ups with their IR info? Eegad. Didn't know that, and wouldn't generally want that. My wife (a former IR manager) was shocked to hear it. Re: other issues, Jim, would like to here from you privately. It appears you know my identity. Paul and a bunch of others have already e-mailed me. Would welcome one from you. Mike

    SubjectThe REAL best pick (IMHO)
    Entry09/15/2000 01:19 AM
    Membermichael7
    The REAL best stock pick was NeoMagic (NMGC), already up 47% from the date that vir137 picked it. Impeccable timing. NMGC was the very stock I used as my initial recommendation to apply as a VIC member. A semiconductor company in the hot wireless segment of the industry, yet trading at a significant discount to net cash value. Wow! Unfortunately, vir137 lost points because he didn't do a very thorough writeup. The fact that vir137 and myself both picked the same stock makes me question the viability of having 250 stock pickers here each doing several picks a year. There just aren't enough stocks to go around.

    Subject*** OFF TOPIC QUESTION***
    Entry10/09/2000 06:40 PM
    Memberkerry87
    A simple question for those of you that have been posting here for some time now. I was granted admission to VIC just today. I entered way back on september 25/26th. The idea stock that I submitted is currently not among those listed in the ideas indexes. Will the VIC powers-that-be make my original submission available as a thread, or must I create a new idea and repeat the original entry? Thank in advance for any replies. KJC

    Subjecteffect of lower commodity pric
    Entry10/12/2000 12:22 PM
    Memberraf96
    BMHC - Building Materials Holding Co. recently warned that lower wood products pricing would hurt margins. Any reason to think HBP will be immune from this factor?

    SubjectIt hit HD too, of course
    Entry10/13/2000 08:09 PM
    MemberSpocksBrainX
    ..

    Subject
    Entry10/19/2000 03:01 PM
    Membercaj10
    How was the quarter?

    SubjectYour Off Topic Question
    Entry11/02/2000 10:40 AM
    Memberpaul212
    VIC does not normally post your application idea directly, but they told me it's OK for you to do so. It may need updating by now. I've gotten answers to such questions pretty quickly by emailing contact@valueinvestorsclub.com. PEB.

    Subjectthe quarter
    Entry11/06/2000 08:18 PM
    Membermichael99
    It was good and perfectly in line. They are on target in most ways, wringing cash out of the balance sheet bloat they acquired from Rugby and paying debt down. Synergistic savings on the cost side are ahead of schedule. The picture I envisioned will emerge in final form very late next year, as windows volume is replenished in a higher margin manner, cost structure is finalized, and Huttig begins activities such as buybacks and/or extremely accretive acquisitions with their improved capital structure. That will be good for at least a 50% gain, with no significant downside. Adverse lumber pricing is a bigger factor than I figured, but in general I ignore commodity as well as most foreign currency fluctuations. In the long run they tend to even out. I have recently bought the stock, and will likely continue to do so on weakness, though I make no guarantees. Additional comments here will be rare, however. Again, I'll point to the recent Cameron Ashley buyout (CAB) as a comp in terms of proper valuation and hints for accelerated value realization. I'll also note Huttig's hottest hands in its industry in terms of making working capital actually work. Best, Mike

    Subjectvery small thought
    Entry11/08/2000 09:22 AM
    MemberSpocksBrainX
    'That will be good for at least a 50% gain, with no significant downside.' In 1998 I made similar statements about two companies and things didn't exactly work out as I hoped with one of them. What I learned from that experience was that no statement like that HAD to be made, except internally to oneself of course. This is a public board and we ought to make our expectations know, but I cringe when I hear you say that nonetheless. These are businesses after all, and we can't count on the market being rational over a 1 year period, and even the business itself could surprise too. As someone grounded in value oriented philosophies and therefore well-grounded in the market's irrational behavior, I would think you would agree at least in principle. In other words, I would hope you would insert 'I would think' or 'it ought to' in your sentence.

    Subjectagreed and more info
    Entry11/17/2000 08:34 PM
    Membermichael99
    Hard to figure what a stock will do in a one year period. Especially illiquid ones bought for fundamental reasons. I generally don't buy stocks unless I feel very comfortable coming out well in the end by just holding if all else fails. Huttig is no different. Ultimately this one should work out very satisfactory. I can say with some confidence though that there is a seller or sellers sitting ready to sell to any big bid that comes through, and I don't believe Rugby is selling yet. Nibbling is difficult but when buying bigger blocks it isn't hard to get the bid or close to it despite no showing on the ask side. It may even be various institutions that got the shares in the Crane spin-off still selling. Sometimes it takes a while for the spin-offs to get rid of these deadbeat shareholders. Hence, there may be a lid on this one at 4 1/2 to 5 for a while. My other idea, ValueClick, also appears to have something/someone sitting on it at 5. Ultimately, these technical barriers will give way to the underlying fundamentals. On Huttig, some clarification on the lumber situation: the company earns the same basic margins whether lumber prices are high or low, but revenues fluctuate high when prices are high and low when prices are low. Hence, no matter the margin stability, the cash dropping out the bottom will correlate with lumber prices fairly directly. Earnings will fluctuate back up just as they came down with lumber prices. Also, apparently they are consolidating some five different software systems into one, which will improve their working capital management even more. In this business, such management is everything. Material results from this should be expected by the end of next year, along with additional debt repayment. Evidently the company is generally limited in buying back stock because of its debt covenants, and hence will focus on debt repayment over stock buyback for now. That's my understanding. Best, Mike

    SubjectVolume - Price
    Entry09/24/2002 03:18 PM
    Memberlil305
    Although there haven't been any posts here for almost 2 years, I assume that there are others who are following this name, and maybe a few, like me, who are owners.
    Volume has generally been anemic and the stock has gradually sold off from a high of over 6 in January. Today a "large" block of 33,200 shares was traded at $3.50, down from $3.89 at the beginning of the day. We were then off to the races with very large blocks coming out of the woodwork. This is very uncharacteristic. Any idea of what is going on and more importantly, how the business is faring?

    SubjectAnyone still follow?
    Entry01/14/2003 11:29 PM
    Memberroark304

    Subject
    Entry01/14/2003 11:30 PM
    Memberroark304

    SubjectAnyone still follow?
    Entry01/15/2003 01:48 AM
    Memberroark304
    Anyone up on the story?

    Was wondering whether anyone had any insight on why these guys seems to miss their own guidance nearly every quarter without any obvious reason to overpromise or promote?

    Also, who or what is the "competitive situation" in Kansas City that's cutting into sales and margins? To what extent have Home Depot and Lowe's begun to encroach on pieces on HBP's distribution business?





    SubjectYahoo Chatroom
    Entry01/15/2003 06:31 AM
    Memberlil305
    I am a shareholder (unfortunately) but have no insight on why the company has performed so poorly. FWIW, the Yahoo chatroom has been unusually negative on management while acknowledging that a buyout by another distributor is probably in the works.
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