Founded in 1858, The Eastern Company (EML, Financial) is a manufacturer of industrial hardware, security products and metal castings. It operates from four U.S. operations and six wholly owned foreign subsidiaries in Canada, Mexico, Taiwan and China. EML operates in three business segments: Industrial Hardware, Security Products and Metal Products, which accounted for 68%, 16% and 16% of its 2011 revenue, respectively.
The Industrial Hardware Group manufactures an extensive selection of latches, locks and other security hardware used throughout the transportation and industrial sector of the economy. The Eberhard division has been an industry leader for more than a century, setting the standard for high-quality hardware for a variety of applications, especially in the transportation industry.
The Security Products Group meets the need for products that safeguard property and control access. The Greenwald Industries Division is a major manufacturer of coin acceptors and metering systems to secure the cash used in self-service laundry facilities. The Illinois Lock Company/CCL Security Products Division produces custom-engineered locks for a variety of original equipment manufacturers and is a leading producer of keyless locks sold under well-known brand names such as Sesamee, Presto and Huski. In addition, The Security Products Group provides a new level of security for the access control, municipal parking and vending markets through the use of “smart card” technology.
The Metal Products Group consists of the Frazer & Jones Division. Frazer & Jones manufactures anchoring devices for supporting underground mine roofs. It is a recognized leader in the production of these critical safety devices for the United States, Canadian and Australian mining industries.
Guru and Insider Alerts
Mario Gabelli currently owns 28,000 shares in EML, with an average cost of approximately $15 per share. He bought 2,000 shares at an average price of $18.5 per share in the third quarter of 2012. NSB Advisors LLC, an investor adviser firm, sold more than 1 million shares of EML in the third quarter of 2012, reducing its holdings in EML from 2.4 million shares to 1.4 million shares.
Valuation
EML currently trades at a trailing-12 months P/E of 11.78 and a trailing-12 months EV/EBITDA of 5.30. Its current P/E valuation is at a 32% discount to its five-year average P/E of 17.33. EML achieved a 11.3% ROE for the past 12 months and a five-year average ROE of 8%.
EML P/E-ROE Comparison
EML has been profitable for every single year in the past decade and is free cash flow positive in nine out of the last ten years. The negative free cash flow in 2011 was largely attributable to a $5 million discretionary contribution made to its salaried pension plan in December 2011. The major reasons for the contribution were to reduce 2011 cash payments for federal income taxes and future years’ pension expenses. In 2010 and 2011, EML experienced price increases for many of the raw materials, including scrap iron, zinc, brass and stainless steel, which impacted its gross margins.
EML Earnings-Cash Flow Comparison
EML Profit Margins Analysis
Financial and Business Risks
EML has a strong balance sheet in the form of a net cash financial position with net cash of $10 million representing 10% of its current market capitalization of $98 million.
EML Cash-Debt-Market Capitalization Comparison
While EML's raw materials are readily available on the open market from a variety of producers, any increase in the price of raw materials could put pressure on its profit margins, if it was unable to pass on the cost increases to its customers.
EML mentioned in its 2011 10-K that union contracts covering approximately 37% of the total workforce will expire in 2012. Failure to negotiate new union contracts could lead to an increase in labor costs or even possibly result in a disruption of its business operations.
EML faces potential legislation risk, especially in the area of environmental laws. During the fourth quarter of 2010, EML engaged an environmental clean-up company to perform testing and develop a remediation plan in Illinois, if needed, after it was contacted by the State of Illinois regarding potential ground contamination at its plant in Wheeling, Ill.
EML has limited customer concentration risk, with no single customer accounting for more than 10% of its 2011 sales or receivables.
Business Quality and Capital Allocation
EML faces competition in all of its business segments and products, in particular offshore competition in the form of imports from Asia and Latin America which boost of favorable currency exchange rates and low cost labor. It has responded to competition by meeting customer needs on a timely basis with high quality diversified products. This has been achieved through expanding product lines through product development and acquisitions, maintaining sufficient inventory for fast turnaround of customer orders, and the utilization of cost-effective manufacturing capabilities through three wholly owned subsidiaries in Asia.
Two non-business related announcements in the past year could improve EML's visbility and provide a boost to EML's stock price. Firstly, EML transferred its stock listing from the NYSE Amex Exchange to Nasdaq on Dec. 15, 2011. Secondly, EML was included in the Russell Global Index on Jun. 25, 2012, opening the door for more institutional investors.
EML has paid dividends in every single year since 1940 and currently sports a dividend yield of 2.5% (excluding special dividend) with a dividend payout ratio of 29%. Dividends are paid quarterly. On Oct. 24, 2012, EML announced that its Board of Directors had declared an additional one-time special dividend of ten cents per share, on top of its regular quarterly dividend of ten cents per share, which also represents EML's 289th consecutive quarterly dividend.
EML Dividend Payout-DPS Comparison
Conclusion
EML has a strong profitability and free cash flow generation track record. It is currently attractively priced at 5.3x EV/EBITDA and significantly below historical P/E valuations. Listing on Nasdaq and inclusion in the Russell Global Index should improve EML's visibility and provide for a stock price re-rating in due time.
Disclosure
The author does not have a position in any of the stocks mentioned.
The Industrial Hardware Group manufactures an extensive selection of latches, locks and other security hardware used throughout the transportation and industrial sector of the economy. The Eberhard division has been an industry leader for more than a century, setting the standard for high-quality hardware for a variety of applications, especially in the transportation industry.
The Security Products Group meets the need for products that safeguard property and control access. The Greenwald Industries Division is a major manufacturer of coin acceptors and metering systems to secure the cash used in self-service laundry facilities. The Illinois Lock Company/CCL Security Products Division produces custom-engineered locks for a variety of original equipment manufacturers and is a leading producer of keyless locks sold under well-known brand names such as Sesamee, Presto and Huski. In addition, The Security Products Group provides a new level of security for the access control, municipal parking and vending markets through the use of “smart card” technology.
The Metal Products Group consists of the Frazer & Jones Division. Frazer & Jones manufactures anchoring devices for supporting underground mine roofs. It is a recognized leader in the production of these critical safety devices for the United States, Canadian and Australian mining industries.
Guru and Insider Alerts
Mario Gabelli currently owns 28,000 shares in EML, with an average cost of approximately $15 per share. He bought 2,000 shares at an average price of $18.5 per share in the third quarter of 2012. NSB Advisors LLC, an investor adviser firm, sold more than 1 million shares of EML in the third quarter of 2012, reducing its holdings in EML from 2.4 million shares to 1.4 million shares.
Valuation
EML currently trades at a trailing-12 months P/E of 11.78 and a trailing-12 months EV/EBITDA of 5.30. Its current P/E valuation is at a 32% discount to its five-year average P/E of 17.33. EML achieved a 11.3% ROE for the past 12 months and a five-year average ROE of 8%.
EML P/E-ROE Comparison
EML has been profitable for every single year in the past decade and is free cash flow positive in nine out of the last ten years. The negative free cash flow in 2011 was largely attributable to a $5 million discretionary contribution made to its salaried pension plan in December 2011. The major reasons for the contribution were to reduce 2011 cash payments for federal income taxes and future years’ pension expenses. In 2010 and 2011, EML experienced price increases for many of the raw materials, including scrap iron, zinc, brass and stainless steel, which impacted its gross margins.
EML Earnings-Cash Flow Comparison
EML Profit Margins Analysis
Financial and Business Risks
EML has a strong balance sheet in the form of a net cash financial position with net cash of $10 million representing 10% of its current market capitalization of $98 million.
EML Cash-Debt-Market Capitalization Comparison
While EML's raw materials are readily available on the open market from a variety of producers, any increase in the price of raw materials could put pressure on its profit margins, if it was unable to pass on the cost increases to its customers.
EML mentioned in its 2011 10-K that union contracts covering approximately 37% of the total workforce will expire in 2012. Failure to negotiate new union contracts could lead to an increase in labor costs or even possibly result in a disruption of its business operations.
EML faces potential legislation risk, especially in the area of environmental laws. During the fourth quarter of 2010, EML engaged an environmental clean-up company to perform testing and develop a remediation plan in Illinois, if needed, after it was contacted by the State of Illinois regarding potential ground contamination at its plant in Wheeling, Ill.
EML has limited customer concentration risk, with no single customer accounting for more than 10% of its 2011 sales or receivables.
Business Quality and Capital Allocation
EML faces competition in all of its business segments and products, in particular offshore competition in the form of imports from Asia and Latin America which boost of favorable currency exchange rates and low cost labor. It has responded to competition by meeting customer needs on a timely basis with high quality diversified products. This has been achieved through expanding product lines through product development and acquisitions, maintaining sufficient inventory for fast turnaround of customer orders, and the utilization of cost-effective manufacturing capabilities through three wholly owned subsidiaries in Asia.
Two non-business related announcements in the past year could improve EML's visbility and provide a boost to EML's stock price. Firstly, EML transferred its stock listing from the NYSE Amex Exchange to Nasdaq on Dec. 15, 2011. Secondly, EML was included in the Russell Global Index on Jun. 25, 2012, opening the door for more institutional investors.
EML has paid dividends in every single year since 1940 and currently sports a dividend yield of 2.5% (excluding special dividend) with a dividend payout ratio of 29%. Dividends are paid quarterly. On Oct. 24, 2012, EML announced that its Board of Directors had declared an additional one-time special dividend of ten cents per share, on top of its regular quarterly dividend of ten cents per share, which also represents EML's 289th consecutive quarterly dividend.
EML Dividend Payout-DPS Comparison
Conclusion
EML has a strong profitability and free cash flow generation track record. It is currently attractively priced at 5.3x EV/EBITDA and significantly below historical P/E valuations. Listing on Nasdaq and inclusion in the Russell Global Index should improve EML's visibility and provide for a stock price re-rating in due time.
Disclosure
The author does not have a position in any of the stocks mentioned.
