Huttig Building Products (HBPI.PK) - $.23 on the Pink Sheets on February 17, 2009
(Up until December 3, 2008 the stock was traded on the New York Stock Exchange.)
- 52 week price range: $3.45 - .18
- Diluted shares: 21.5 million
- Market cap: $4.9 million
- Debt: $24.1 million
- Enterprise value: $29.0 million
The risk / reward ratio of buying Huttig at around the current market price of $.23 with a price target of $2.00 per share or higher seems very compelling. I view this as prudent way to make a highly leveraged investment that is dependent on a recovery in the U.S. housing market.
Profitability at Huttig Building Products is linked with homebuilding activity in the U.S. Therefore, based on the severe decline in housing starts, Huttig is currently generating significant losses, and the company’s stock has become almost worthless.
Typically when a stock price falls from higher levels to pennies, the basic survival of the company is in question and in many cases bankruptcy may be imminent. However, based on my analysis Huttig can survive, and the company does not seem to be even close to a voluntary or involuntary bankruptcy.
Housing starts have fallen from a recent peak of 2,068,000 in 2005 to 904,000 in 2008. My forecast is for a further decline to 650,000 in 2009 followed by 950,000 in 2010, 1,100,000 in 2011, 1400,000 in 2012, and 1,600,000 in 2013. Based on this housing forecast I estimate that Huttig will not generate a yearly profit until 2012. However, Huttig is not overly burdened with debt, and the company has a credit facility that should enable it to survive multiple years of losses.
My estimate of fair value for Huttig is based on three different methodologies - complete liquidation of the company in the near-term, a multiple of normalized EBITDA, and a discounted cash flow model. I estimate a liquidation value of $2.72 per share, and my estimate of fair value based on normalized EBITDA is $1.83. Using a discounted cash flow model I estimate fair value at $2.12 per share.
Huttig Building Products is a distributor of various kinds of building materials. The company purchases from manufacturers and distributes products through 30 distribution centers serving 45 states. These distribution centers sell primarily to building materials dealers and national buying groups of such dealers, which in turn sell to homebuilders and remodeling contractors. To a lesser extent sales are also made to home centers and industrial users including makers of manufactured homes.
The products Huttig sells can be broken down into three main categories. Millwork makes up about 45% of sales and includes doors, windows, and mouldings. General building products are about 43% of sales and include roofing, siding, insulation, and composite decking. Finally, wood products make up about 12% of sales and are to a large extent engineered wood products such as I-joists, glulam, and LVL. The company distributes very little commodity wood products such as dimension lumber and wood panels used for sheathing.
Notable competitors that are larger than Huttig include BlueLinx (BXC) and the building materials distribution arms of Weyerhaeuser (WY) and Boise Cascade, which is a privately owned company. Huttig also competes against numerous other companies that are smaller than itself.
Huttig is a publicly owned company, and the stock traded on the New York Stock Exchange under the symbol HBP up until December 3, 2008, when trading was suspended for failure to comply with rules related to minimum market capitalization. The stock now trades on the Pink Sheets under the symbol HBPI.
The stock traded at an all-time high of $12.00 per share in June 2005, and the price has generally declined since then. This price decline to a large extent reflects the decline in housing starts that has occurred over that time period, since new home construction is the largest form of demand for the products that Huttig sells. The company generated peak sales and earnings of $1,097 million and $.84 per share respectively in 2005, when homebuilding activity was very healthy.
In 2008 sales were $671 million, and the company lost $.88 per share excluding non-recurring items and assuming an estimated normal tax rate. I am forecasting that sales and earnings will worsen further in 2009 before results start to improve in 2010. In my long-term income model the company does not make a yearly profit until 2012.
At the end of 2008 Huttig had a solid balance sheet as evidenced by a current ratio of 2.03 and a long-term debt to equity ratio of .34. Equity was $70.3 million, and book value per share was $3.27.
The company has a $160.0 million credit facility, which runs until October 20, 2011. Also, the credit limit can be increased by up to an additional $40.0 million under certain conditions and approvals. Borrowing availability under the facility is based on eligible accounts receivable, inventory, and real estate. As of December 31, 2008 debt was $24.1 million, and unused borrowing capacity was $44.5 million. There is just one financial covenant, a fixed charge coverage ratio, and it is only tested, when unused borrowing capacity is less than $25.0 million. Based on my financial modeling I believe this credit facility provides sufficient borrowing capacity for Huttig to survive the losses that I am projecting for the next several years.
Huttig has one notable shareholder, which is CEMEX (CX), the large Mexican cement company, and they are the largest shareholder by far. CEMEX owns a little under 5.8 million shares, which is almost 27% of total shares outstanding. These shares were acquired by CEMEX in 2005 in connection with an acquisition by CEMEX of a company that owned the Huttig shares. Almost from the time that CEMEX acquired the shares, they have publicly indicated that they have no intention of acquiring any additional shares, and that they intend to sell some or all of the shares that they own. While the prospect of this block of stock being sold could be perceived as an impediment to the stock price rising, it is such a large block that it would most likely have to be sold in a negotiated transaction. CEMEX’s desire to sell might even be viewed as an opportunity to buy a meaningful amount of stock in one transaction.
The stock has the potential to increase more than eight-fold from the current price level. The risk is that the stock price goes to zero, if the company fails. However, I think it is more likely that the company will survive, so the risk / reward ratio for a relatively small investment looks very attractive.
Disclosure: Long HBPI.PK.