At HypeZero, we love spin-offs. Especially spin-offs of companies that are not heavily covered by Wall Street. At the end of the day tomorrow, one such company, Nacco Industries (NC), will spin-off its biggest and most profitable business, Hyster-Yale Materials Handling, Inc (HY).
Nacco Industries operates four distinct business segments.
- Hyster-Yale Materials Handling, Inc designs, engineers, manufactures, sells and services "a comprehensive line of lift trucks and aftermarket parts marketed globally" under the brand name Hyster and Yale.
- "Hamilton Beach Brands. The Company's wholly owned subsidiary, Hamilton Beach Brands, Inc. ("HBB"), is a leading designer, marketer and distributor of small electric household appliances, as well as commercial products for restaurants, bars and hotels."
- "Kitchen Collection. The Company's wholly owned subsidiary, The Kitchen Collection, LLC ("KC"), is a national specialty retailer of kitchenware and gourmet foods operating under the Kitchen Collection® and Le Gourmet Chef® store names in outlet and traditional malls throughout the United States."
- "North American Coal. The Company's wholly owned subsidiary, The North American Coal Corporation and its affiliated coal companies (collectively, "NACoal"), mine and market coal primarily as fuel for power generation and provide selected value-added mining services for other natural resources companies."
At the end of day tomorrow, for every share of NC share, investors will receive one class A share and one class B share of HYC. Class B shares have a right to convert (one for one) into class A shares at anytime.
The current price of Nacco is $118.91 with a market capitalization of nearly $1 billion. Let's break down the value of each business and see if the sum of the parts are going to be worth more than the stock price
Hyster-Yale is one of the top manufacturers and sellers of lift trucks. As you can imagine, the business is cyclical. So, earnings have been up and down. The company earned a little over $80 million over the trailing 12 months. Since bigger and more stable companies like Caterpillar (CAT) and CNH Global (CNH) are trading at around 9 times earnings, 8 times earnings is a fair price for Hyster-Yale. So, Hyster-Yale is worth around $640 million.
Hamilton Beach Brands
Hamilton is on pace to do better than the $18.4 million that they earned last year. One of the biggest drawbacks for Hamilton is that their top five customers accounted for about half of their revenue with Wal-Mart (WMT) accounting for 30% of it. A multiple of 8 or a valuation of about $160 million is a fair estimate for Hamilton. So, Hyster-Yale and Hamilton combine for a valuation of $800 million.
Kitchen Collection earned a little over $1 million last year on revenue of over $200 million last year and is on pace for similar numbers this year. Kitchen Collection is a low margin business in a competitive space. It would make sense for the company to just shed this business. We would not value it more than a quarter of revenue or about $50 million. So far, we have $850 million for the three businesses.
North American Coal
North American Coal is somewhat immune to the fluctuation of the price of coal. "The contracts with the unconsolidated mines' customers allow each mine to sell coal at a price based on actual cost plus an agreed pre-tax profit per ton or cost plus a management fee per ton during the production stage." The company earned almost $30 million last year and is on track to earn more this year. This business has to be worth more than the $150 million (less than 5 times income) that is left ($1 billion - $850 million valuations for other three businesses). So, Nacco is undervalued.
Although Nacco is undervalued, we are going to skip the spin-off offering. The main reason is that none of the businesses are worth holding onto for the long term. However, if we had looked at the offering only one month back when Nacco was trading at a 15% discount, this would have been a screaming buy.