(And nobody is listening, hence the opportunity)

Hillenbrand 60 Second Summary:

  • $3.5bn market cap
  • Double digit earnings growth
  • 2% dividend yield
  • Authorization to buy-back 10% of shares outstanding.
  • 11% FCF Yield so could buy that stock back from ongoing FCF
  • Founded in 1906 – longevity
  • If management just avoids making an expensive acquisition, this stock can deliver significant growth & cash returns to shareholders

Firm Basics: Please Find a FANTASTIC Just Released Investor Presentation

  • ~45% of revenues come from “Advanced Process Solutions” (APS)
    • APS serves the plastics, foods, pharmaceutical, chemicals, fertilizer, minerals and energy industry
    • Innovative culture makes them a leader in everything from reducing plastic weight to improve automotive fuel economy to more efficient packaging to improve food shelf-life and improving the safety of product delivery in the medical space
    • Technical prowess creates significant leverage to in developing markets with a focus on biodegradeable plastics and recycling
  • ~35% of revenue comes from “Molding Technology Solutions” (MTS)
    • MTS is a leader in highly engineered injection molding equipment with significant brand recognition, having served many customers for over 30 years
    • MTS benefits from global population growth and rising purchasing power in developing countries
    • Their products serve the medical community, construction and consumer products categories
  • ~20% of revenues comes from the “Batesville” division – the recognized leader in the North American death care industry where they have been designing & selling funeral services products for 115 years

Hillenbrand Company Wiki for Investors, Courtesy of KCR

KCR writes this with tongue firmly in cheek. There are few companies with businesses of this quality that have less material on them than Hillenbrand in our view. Only 4 analysts are covering the stock, and there is obviously no Wikipedia page on them.

Hillenbrand is a company that benefits from ALL of the below trends:

  • improving fuel efficiency in passenger cars
  • making food packaging safer and less costly while helping improve food preservation
  • increased recycling and a shift to bio-based materials manufacturing
  • streamlining the process of making batteries for electric vehicles
  • the growing middle class in India and China

KCR asks that you stare at that list. Set the caskets and end-of-life business aside for a moment. That looks like a word-jumble put together by an AI machine trying to get investor attention. Those bullets are a list of themes investors are excited about.

Yet that is precisely what Hillenbrand does: serve those markets. The stock trades at an 11% FCF Yield, has a solid balance sheet, pays a 2% dividend, is authorized to repurchase 10% of their shares, and is growing earnings ~10%.

Below are just some simple notes around the slides you can find on Hillenbrand’s IR website. Hillenbrand is at the top of our Small Cap Ranking Model, and we hope the notes below inspire some to dig deeper.

Listening to the recent earnings conference call, Daniel Moore from CJS Securities asked a number of thoughtful questions. He is, of course, one of the four analysts covering the firm. Daniel might be a great guy to reach out to for a thorough Hillenbrand stock analysis.[1]

Company Basics: The Batesville Casket Stock Remade

Founded in 1906, Hillenbrand is based in Batesville, Indiana. Folks with gray hair like myself might find their memory jogged by their oldest business, the Batesville Casket Company. That division is now just over 20% of sales, as shown in the slide below.

What may be less well understood is that the firm has grown and diversified into a number of other industries. There is no doubt that their position as a leading provider in the American death care industry has benefited from the Covid outbreak. But now the company also operates two large and growing divisions: Advanced Process Solutions and Molding Technology Solutions.

Hillenbrand Pro Forma Revenue by Segmen and by Georgrpahy and Diversified End Markets

Those two new divisions have turned Hillenbrand into a global diversified industrial company. Their engineered industrial equipment benefits not just from the secular trends outlined below. Even better, roughly ~30% of their revenues are high-margin services from the ever-growing installed base of equipment.

Their process and material handling equipment were recently awarded an order to partner on the first continuous production giga factory in Europe.

Hillenbrand Broad Macro Trends Including Ed Friendly Innovations Supoort Growth Across Core End Markets and Applications

The firm has seen their backlog soar giving investors some comfort around macro cyclicality. For our macro-oriented friends out there concerned about exposure to ISM PMI rolling over (a non-trivial concern), we would suggest that Hillenbrand will fare much better than many of the absurd story stocks losing money and diluting shareholders. In our view, a macro rollover might see the stock take a hit but even then, we believe it will fare far better than myriad other loss-making firms in the R2500G & R2500V indexes.

Hillenbrand Pro Forma Backlog

Hillenbrand Capital Allocation Priorities: Grow, Acquire, Pay Owners & Reduce Debt

Hillenbrand Capital Deployment Priorities

Hillenbrand Stock Risk: M&A

On the first pass, many might think that a reduction in deaths from Covid might be a serious headwind for the firm. And there is no denying that 2021 numbers benefited from their cash-cow legacy business seeing a sharp rise in mortality. But management is on top of the Covid trends and know how to manage this business well, in our view.

KCR believes that management’s prioritization of growth via M&A could be the largest risk the firm faces. This newsletter has documented the obscene multiples being paid for companies by private equity firms drowning in capital with access to cheap debt. Our biggest fear would be Hillenbrand levering up to make an expensive acquisition at what could be a cyclical peak.

In their latest earnings conference call, management spoke on two separate occasions about how busy and expensive the acquisition market was. We think this speaks to capital discipline and a reticence to pay high multiples when their own stock is so cheap.

How many well-run firms with exposure to such terrific secular trends are you aware of trading at 10% FCF Yields? What if management decided to use their FCF to buy back 10% of the company’s shares outstanding?

Hillenbrand Evolution of Net Leverage

Our offer of a free Enron hat was designed to help bring a painful moment in history forward with a bit of levity. That piece reminds us of what may be wrong with markets today. Conversely, Hillenbrand’s stock is a reminder of the opportunities today’s mania has created, in our view.

Our recent research highlighted that growth at a reasonable price had never looked more appealing to us based on historical data. In a market afflicted by stocks at record valuations and soaring debt to EBITDA ratios, our bear traders and are clean tech stocks a short posts are our attempt to inspire caution. KCR has documented the generational opportunity to invest in companies that make stuff you need.

Few companies check the “what you need” box quite like Hillenbrand. Look around the world today. Soaring energy prices, rampant food inflation, a rush to electric vehicles, and huge capital deployment around sustainability are everywhere.

As always, we encourage investors to do their own homework!! We would also like to thank the IR and management team for their stellar disclosure and wish them well on what sounds like a terrific opportunity.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

[1] KCR has no business relationship with this firm and have not read their research on Hillenbrand. We asked a thoughtful client who specializes in Small Cap stocks if they knew about CJS, and the response was immediate: “they are a research firm that does terrific research on small-cap stocks that are mispriced – sort of what you would think Wall Street was meant to do.”

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

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February 18, 2022 |

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