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Hillenbrand Inc. – ‘Dead Money’ That’s Good for You

July 20, 2009 | About:
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.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 2.9/5 (9 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
Once again Barrons comes late to the party...

Signs of Life at Hillenbrand

By JOHANNA BENNETT - Barrons.com

The situation is anything but grave for the nation’s largest casket maker.

IT’S BEEN A CHALLENGING year for the funeral industry, but shares of casket maker Hillenbrand (ticker: HI) are resurrecting themselves, climbing 23% since early March.

Still, Hillenbrand’s stock has underperformed the Russell 2000 and other major stock indexes since then.

Sales are falling due to the recession and a surprisingly low number of deaths this year. Rivals are cutting prices. And a growing preference for cremations has hurt demand for coffins and could hobble future growth.

But at under 11 times expected 2010 earnings and with a rich 3.7% dividend yield, Hillenbrand could climb another 26% in the next 12 months.

“They are well positioned in an industry that is going to be around for a long time,” says Jamie Clement, an analyst with Sidoti & Co. “They don’t have a lot of sell-side analyst coverage. They do have a great balance sheet, great return metrics and the dividend pays patient investors.”

In the next three years, Hillenbrand plans to generate annual revenue growth of 5% to 8%. Acquisitions could play a big role in that. Thanks to modest capital needs, the company has plenty of excess cash.

Analysts see profits climbing more than 8% to $1.81 a share during the next fiscal year, which begins on Oct. 1.

“In a volatile stock market, quality wins out and quality is all about the strength of the balance sheet,” says Paul Magnuson, manager of the Allianz NFJ Small-Cap Value Fund.

At a Glance

Hillenbrand (HI)

Stock Price: $19.91

52-Wk High: $24.17

52-Wk Low: $13.28

Market Cap: $1.2 billion

Est. FY 2010 EPS*: $1.81 per share

FY 2010 P/E: 10.9x

Est. Long-Term EPS Growth**: 8%

Est. (FY’10/FY’09) EPS Growth: 8.3%

Revenue (trailing 12 months): $654.8 million

Dividend Yield: 3.7%

CEO: Kenneth A. Camp

Headquarters: Batesville, Ind

Spun off from the former Hillenbrand Industries in March 2008, today’s Hillenbrand is the nation’s largest casket maker and controls roughly one-quarter of a $2.4 billion market for funeral products.

The company also sells urns and various keepsakes. But casket sales to funeral homes generated 90% of Hillenbrand’s revenue during the fiscal year that ended on Sept. 30, 2008.

It’s not a fast-growing industry. Hillenbrand is not a household name (though one of its caskets was used during Michael Jackson’s public memorial service). But in theory, it’s a haven in bad times. After all, death is one of just two sure things in life.

By 2025, the number of deaths in the U.S. could climb 25%, according to the Cremation Association of North America.

But these days, Americans are thinking twice about spending on high-end caskets. A mild flu season helped keep the U.S. death rate unusually low. And the National Funeral Directors Association says 39% of deaths next year will result in cremations.

In April, Hillenbrand cut its financial forecasts for the current fiscal year, ending on Sept. 30. It now sees earnings dipping by as much as 5% to $1.65 a share on revenue that could fall by as much as 4% to $650 million.

“It’s a difficult and unprecedented economy,” Chief Executive Kenneth Camp told investors earlier this year adding “we are taking decisive and targeted actions to protect our market position and manage successfully through this downturn.”

Camp was not available for an interview.

Hillenbrand is growing sales of lower-price coffins. But the company also plans to depend less on burials by adding new cremation products and boosting sales of merchandising tools and services to funeral homes.

And in December, Hillenbrand announced plans to drive future revenue growth with acquisitions, though it has yet to cut any deals.

“Good solid companies in our target sweet spot” are not eager to sell for current bargain prices, Camp told investors during a conference call earlier this month.

“We want to be prudent,” he added. “We want to do good acquisitions at the right time. Fast is not nearly as important as good.”

Still, Hillenbrand has plenty of dry powder.

Its balance sheet includes just $80 million in debt.

And after Hillenbrand pays out $46 million in dividends, free cash flow should total $63 million this year, says Sidoti’s Clement. And he sees another $65 million in excess cash next year.

At 10.9 times projected earnings for 2010, the stock trades at a sharp 46% discount to the Russell 2000, according to Thomson Reuters.

Clint Fendley, an analyst at Davenport & Co., however, expects the stock to reach $25 a share in the next 12 months, or nearly 14.4 times his earnings estimate for 2010 of $1.74 a share.

Of course, an economic turnaround is not a sure thing.

Dealings with large funeral homes have become more competitive. Imported caskets could grab market share. And cremation continues to gain popularity.

Hillenbrand, meanwhile, also faces lawsuits. An unfavorable ruling or a large monetary award could prove devastating.

But recent court rulings have been positive for Hillenbrand.

Loads of excess cash give Hillenbrand plenty of fuel for hiking its dividend, repurchasing stock and making acquisitions.

With profits set to grow next year, the stock should reap anything but grim returns.

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