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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (215)  | Author's Website |

Horizon Global Has Great Quarter, but Be Leery of Auto Industry

Defaults in the auto industry could hurt the stock

August 02, 2017 | About:

Horizon Global Corp. (NYSE:HZN) is the largest manufacturer of hitches and hauling equipment in the world. Management has an eye for shareholders and has been growing through mergers and acquisitions. Third Avenue Small Cap is a shareholder.

The stock trades for $17.77 and there are 25.385 million shares. The market cap is $451 million.

The company has a goal of getting operating margins to 10%, two times capital structure and 3% to 5% in organic growth. It seems management has an eye toward shareholders. The company estimates earnings per share will be $1.04 to $1.14 this year. I will use management’s guidance and put a price-earnings ratio of 17.

The balance sheet has $39.5 million in cash and $121.6 million in receivables. The liability side has $281 million in debt and $121.2 million in payables. Management is trying to pay down debt. Horizon was spun off from TriMas Corp. (NASDAQ:TRS) two years ago.

Horizon manufacturers all types of gadgets you see on vehicles driving down the road, hauling boats, bicycles and cargo. Brand names include Westfalia, Bulldog, Draw-Tie and Fulton. Of its revenue, $97.8 million came from the Americas this quarter, $78.5 million from Europe and Africa and $26.9 million from Asia. The company has over 1,000 patents. It is opening a new distribution center in Kansas City, Missouri.

I will quote Third Avenue Value’s Small Cap Fund (TVSVX):

“Through acquisitions, Horizon has evolved from an aftermarket hitch manufacturer to a company with a diverse portfolio of products across different brands that serves the DIY market (through e-commerce on Amazon.com and etrailer.com, which account for about 30%of sales), aftermarket and private labels through resellers (U-Haul, LKQ, Autozone, Walmart, Home Depot, which account for about 40%of sales) and now Original Equipment Manufacturers/OEM (Ford, Toyota, GM, which account for about 30%of sales). About half of Horizon products are used in commercial applications such as construction, marine, military, mining and municipalities. The rest are for recreational uses, including boat towing, power sports, horse/livestock, RVs and truck accessories.”

Horizon has grown through mergers and acquisitions. Shares outstanding were 18.162 million last year and are now 25.385 million. It purchased Westfalia and Best Bars Ltd. in New Zealand. The stock jumped yesterday when second-quarter numbers were released. Management has done a good job integrating divisions. I think Third Avenue got in around $14, so they are making a nice little profit.

What concerns me is a report I read from Casey Research. Casey says the auto market is $1.2 trillion, the average loan is $29,000 and the auto loan market is 58% larger than it was in 2009. Wow! The report also says loans 90 days delinquent have grown to 3.8%.

Short term, Horizon looks interesting. Long term, I would not hold anything that has to do with automotive. It looks like defaults are on the rise. Perhaps this is why the stock trades at such a reasonable valuation. Horizon does make a quality product. If you want a $300, high-end bike rack for your Mercedes, Horizon is the company to go to. I just do not want anything to do with auto at this point in the economic cycle.

Disclosure: We do not own shares.

About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

Visit Holmes Osborne, CFA's Website


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