These shares have been trading as a separate entity since their spin-off from Hill-Rom Holdings on March 24, 2008. The company has been virtually ignored by the investment community ever since with little analyst coverage and no real sponsorship. Underfollowed issues often provide opportunity.
Hillenbrand is the holding company for Batesville Casket Company. They provide ‘death care’ products such as burial caskets, cremation urns and containers plus other memorialization products. The aging of America would suggest a growing need for their products and services.
Hillenbrand [NYSE:HI] July 20, 2009: $17.62
52-week range: $13.28 (Nov. 21, 2008) - $24.80 (Aug. 11, 2008)
Dividend = $0.185 quarterly = 4.19% current yield
The nature of the industry has been a plus in our poor economy.
Death waits for no man- keeping HI’s sales and cash flow very steady.
Here are the per share numbers (from continuing operations) since 2007 as reported by Value Line (Fiscal Years end Sep. 30th) FY 2009 includes Zacks estimates for June and September:
FY …..… Sales …... C/F …... EPS …... Div …... B/V ….. Avg. P/E
2007 … 10.76 ….. 1.90 …. 1.60 ….. 0.73 …. 2.92 ….… N/A
2008 … 10.92 ….. 2.00 …. 1.68 ….. 0.73 …. 4.64 …… 12.2x
2009 … 10.65 ….. 1.95 …. 1.68 ….. 0.74 …. 5.55 …… 10.6x
With a current yield of 4.19% and a P/E of < 10.5x the shares look inexpensive. They traded as high as $24.80 last August and touched $20 since the start of this year.
Here’s a nice short-term play that works well even if the shares just stay where they are from
now through January 15, 2010:
................................................Cash Outlay .............. Cash Inflow
Buy 1000 HI @$17.62 ..................$17,620
Sell 10 Jan. $17.50 calls @$1.40 ....................................$1,400
Sell 10 Jan. $17.50 puts @$1.60 ...................................$1,600
Net Cash Out-of-Pocket ................$14,620
If Hillenbrand shares remain above $17.50 on expiration date:
• The $17.50 calls will be exercised.
• You will sell your shares for $17,500.
• The $17.50 puts will expire worthless.
• You will have collected $370 in dividends.
• You will have no further option obligations.
• You will hold no shares and $17,870 in cash.
That’s a best-case scenario net profit of $3,250 on your initial
cash outlay of $14,620.
$3,250 / $14,620 = 22.2% total return
achieved in under 6 months on shares that did not need to move up at all.
What’s the risk?
Should Hillenbrand shares be < $17.50 on expiration date:
• The $17.50 calls will expire worthless.
• The $17.50 puts will be exercised.
• You will be forced to buy an additional 1000 shares.
• You will need to lay out another $17,500 of cash.
• You will have collected $370 in dividends.
• You will have no further option obligations.
• You will end up with 2000 shares of Hillenbrand.
What’s the break-even on the whole trade?
On the first 1000 shares it’s their $17.62 purchase price less
the $1.40 /share call premium = $16.22 /share.
On the ‘put’ shares it’s the $17.50 strike price less
The $1.60 /share put premium = $15.90 /share.
Your net cost would average $16.06 /share
excluding dividends and $15.69 /share net of yield.
Hillenbrand shares could drop by as much as 10.9% without causing
a loss on this trade.
Summary:
Low-volatility, high yielding Hillenbrand shares appear to have limited downside.
The combination play detailed here could provide a cash-on-cash return of over 22% in less than six months even if the shares do absolutely nothing.
You have a better than 10% margin of safety even if you're wrong.
Disclosure: Author is long Hillenbrand shares and short their options.
Hillenbrand is the holding company for Batesville Casket Company. They provide ‘death care’ products such as burial caskets, cremation urns and containers plus other memorialization products. The aging of America would suggest a growing need for their products and services.
Hillenbrand [NYSE:HI] July 20, 2009: $17.62
52-week range: $13.28 (Nov. 21, 2008) - $24.80 (Aug. 11, 2008)
Dividend = $0.185 quarterly = 4.19% current yield
The nature of the industry has been a plus in our poor economy.
Death waits for no man- keeping HI’s sales and cash flow very steady.
Here are the per share numbers (from continuing operations) since 2007 as reported by Value Line (Fiscal Years end Sep. 30th) FY 2009 includes Zacks estimates for June and September:
FY …..… Sales …... C/F …... EPS …... Div …... B/V ….. Avg. P/E
2007 … 10.76 ….. 1.90 …. 1.60 ….. 0.73 …. 2.92 ….… N/A
2008 … 10.92 ….. 2.00 …. 1.68 ….. 0.73 …. 4.64 …… 12.2x
2009 … 10.65 ….. 1.95 …. 1.68 ….. 0.74 …. 5.55 …… 10.6x
With a current yield of 4.19% and a P/E of < 10.5x the shares look inexpensive. They traded as high as $24.80 last August and touched $20 since the start of this year.
Here’s a nice short-term play that works well even if the shares just stay where they are from
now through January 15, 2010:
................................................Cash Outlay .............. Cash Inflow
Buy 1000 HI @$17.62 ..................$17,620
Sell 10 Jan. $17.50 calls @$1.40 ....................................$1,400
Sell 10 Jan. $17.50 puts @$1.60 ...................................$1,600
Net Cash Out-of-Pocket ................$14,620
If Hillenbrand shares remain above $17.50 on expiration date:
• The $17.50 calls will be exercised.
• You will sell your shares for $17,500.
• The $17.50 puts will expire worthless.
• You will have collected $370 in dividends.
• You will have no further option obligations.
• You will hold no shares and $17,870 in cash.
That’s a best-case scenario net profit of $3,250 on your initial
cash outlay of $14,620.
$3,250 / $14,620 = 22.2% total return
achieved in under 6 months on shares that did not need to move up at all.
What’s the risk?
Should Hillenbrand shares be < $17.50 on expiration date:
• The $17.50 calls will expire worthless.
• The $17.50 puts will be exercised.
• You will be forced to buy an additional 1000 shares.
• You will need to lay out another $17,500 of cash.
• You will have collected $370 in dividends.
• You will have no further option obligations.
• You will end up with 2000 shares of Hillenbrand.
What’s the break-even on the whole trade?
On the first 1000 shares it’s their $17.62 purchase price less
the $1.40 /share call premium = $16.22 /share.
On the ‘put’ shares it’s the $17.50 strike price less
The $1.60 /share put premium = $15.90 /share.
Your net cost would average $16.06 /share
excluding dividends and $15.69 /share net of yield.
Hillenbrand shares could drop by as much as 10.9% without causing
a loss on this trade.
Summary:
Low-volatility, high yielding Hillenbrand shares appear to have limited downside.
The combination play detailed here could provide a cash-on-cash return of over 22% in less than six months even if the shares do absolutely nothing.
You have a better than 10% margin of safety even if you're wrong.
Disclosure: Author is long Hillenbrand shares and short their options.
