Value Play: Hamilton Beach Brands (HBB)

Hamilton Beach Brands (HBB) recently popped up on one of my deep value screens, so I decided to dig a little deeper. I screen for stocks with 

• modest debt 
• low PE 
• strong return on invested capital
• and a dividend yield of at least 2.5%.  

HBB meets these criteria.

Background

Based in Richmond, VA, HBB sells pretty much everything in a kitchen that plugs into the wall, here is a list of their categories:

Source:  Company website

Here are a few other items of note from my research:

• Each of the categories above has multiple products
• HBB spun out of NACCO Industries in 2017
• The company sells products primarily in the US, Canada, and Mexico
• 33% of sales are online
• They are good at developing and selling products under multiple brands
• They are expanding their presence in the fast growing home, health and wellness market
• HBB is developing partnerships with great brands; e.g. Clorox branded air purifiers
• Covid took the stock down with the rest of the market, followed by a strong rebound in the share price with the rest of the market
• Supply chain issues and inflation hurt Q2 and Q3 results some, driving down the stock price. The stock price peaked in May, and has been steadily declining to the present
• However, demand has remained strong and continues to grow at a double digit rate each quarter 
• HBB has increased prices to address inflation, and they are projecting that major supply chain issues will be resolved by mid-2022.
• Sales have increased nicely for four straight quarters, but impact on supply chain will be felt during the (Christmas 2021) current quarter, and perhaps into Q1 and Q2
• Gross margins are 21.2%, and should remain stable with price increases balancing inflation
• Sales of high margin premium products increased 35% this past quarter 
• Revenue increased 48% in the latest quarter
• Return on invested capital is around 17.4%
• Total debt is 36.8%
• In May of 2021 there was ~ $150k worth of insider buying at around $23 per share

Valuation

As of this writing, the price per share is trading around $14.  In the chart below, you can see that the PE ratio is at an historic low of around 7x forward earnings:

Source:  Finbox

The stock has only been trading publicly since 2017, and average PE since the IPO is 12.18x.  One might argue that given the 21% growth in earnings forecast for 2022, the current PE of 8.2x (note: FASTGraphs uses a blended PE which averages projected earnings with current earnings) should expand to at least its historical level of 12.18x, and possibly up to a more typical 15x for a company with earnings growth well above the 7% level implied by a PE 15.

Source:  FASTGraphs and author's annotations

Thesis

• I believe the market has baked the bad news of inflation and supply chain issues into the current low stock price - such that a weak quarter or two will not decrease the stock price too much further. 
• Given that the market tends to look ahead several quarters, HBB may be at a bottom, with lots of positive catalysts on the horizon:
• Price increases
• Continued strong demand
• Expanded high margin health and wellness products
• Continued new product introductions

So, from today's price of ~$14, I expect the stock appreciation to range from 80% to 125% (price by year end between $24 and $30) depending on the whether the stock returns to its historic PE, or a more appropriate expanded PE 15.

And as an aside, I really want to own one of their new and very popular products - The Bartesian Premium Cocktail Machine!

Best regards,

Chump