Columbus McKinnon: Making Progress
Summary
- Columbus McKinnon has been slowly transforming the business in recent years, with some real (margin) success.
- After having made it through COVID-19 quite well, Columbus is using its strength to announce a relatively large deal.
- I like the moves made by the company, yet as expectations run a bit high, I'm leaning cautious here.
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Columbus McKinnon (NASDAQ:CMCO) is a name which I have not covered in the past. The stock surfaced on my radar as it started 2021 with a significant acquisition, one which comes at a price tag of nearly half a billion. The deal is significant and does have some impact on the business, as I'm generally quite constructive on the new direction of the company. While I'm not compelled to chase the shares here, I like the movements, and I'm happily watching the shares from here.
An Intro
Columbus McKinnon presents itself as a highly relevant, professional grade solutions company, looking to solve critical problems of its customers with regard of safety and productivity.
The company has been moving onto a trajectory to move itself from a late-stage cyclical industrial player towards a growth name focused on industrial technology. The company therefore has divested some non-core assets and bolstered its organic growth and margin profile in the meantime, appealing characteristics for any business.
In terms of the actual operations the company was a near $900 million business in 2019, generating revenues of $876 million to be more precise. The company has two large units which each are responsible for roughly 45% of sales. Crane solutions include of course industrial cranes, hoists, controls, components, and works stations, among others. Industrial products is the other large segment with industrial winches, clamps, and manual and electronic hoists. Engineered product is the smallest segment, responsible for a tenth of sales.
Targeted end markets include alternative energy, wastewater treatment plants, aerospace and defense, infrastructure, automation, entertainment, oil and gas and metals processing. The transition is not just coming from greater focus, in terms of fewer activities but results in fewer SKUs and suppliers as well, all while focusing on higher valued added activities and increased R&D investments.
A Little More Background
If we look at the performance of the company over the past decade, we see gradual improvements in the operations. The company grew sales a little over 50% on a cumulative basis in this decade-long period, accompanied by operating margins expanding from mid-single digits to roughly 10%, in part aided by the transformation efforts as well. This growth looks solid, certainly on the earnings front, yet it was accompanied by roughly 20% dilution as well over this period of time.
If we look at the actual share price performance, we see a $15 stock coming out of the 2009 crisis and after briefly trading in their $30s in 2015, shares were back at $15 again in 2016. The structural improvements in the financial results pushed share up to $40 pre-COVID-19. The company reported its fiscal 2020 results in May 2020 as the impact of COVID-19 was of course seen in the fourth quarter of that year, with sales down a little more than 12%.
Full year sales fell nearly 8% as the weakness was not entirely driven by the fourth quarter, yet the quality of sales has been improving with full-year operating margins up 320 basis points to $11.1% of sales. This drove a spectacular increase in earnings per share to $2.50 per share. Net debt of $137 million was very reasonable, with EBITDA reported at $127 million, for a leverage ratio just above 1 time.
With shares trading at $40 ahead of the pandemic, the valuation multiples looked reasonable at 16 times earnings, amidst the relatively modest leverage.
The Pandemic
The valuation looked quite reasonable ahead of the pandemic at $40, yet at that level, the market value stood at just below or frankly around the billion mark, making it not the most well-known stock out there. Shares sold off alongside the market and hit the low twenties in March as investors freaked out, as shares had reclaimed all the lost ground by December 2020, when they traded around the $40 mark again.
In terms of the actual operations, Columbus was hit hard in its first quarter results for 2021, corresponding to the second quarter of the calendar year 2020. Sales plunged 35%, yet despite these dramatic numbers the company managed to squeeze out a tiny operating profit. Second quarter sales fell 22% and despite this still rather dramatic year-over-year decline, operating margins came in at 10% of sales, down a little over 2 points compared to the year before.
Late in January 2021 the company reported its third quarter results as further improvements in the results were seen. Revenues fell 16% on an annual basis as the 420-basis point decline in operating margins to 6.3% was a bit disappointing. The good news is that net debt has been cut to $55 million as leverage is no major concern. The 24 million shares trading at $43 per share by the end of January resulted in a $1.1 billion enterprise valuation, which based on normalized results in 2019 worked down to roughly 1.2 times sales, around 17 times earnings and just below 9 times EBITDA. Despite the margin pressure in the third quarter results the company guided for continued sequential improvements, seeing fourth quarter revenues at $175-$180 million, up significantly from the $166.5 million reported in the previous quarter.
A Big Deal
On the first day of March, Columbus announced a rather significant deal with private equity firm EQT to acquire Dorner Manufacturing. Dorner is a provider of automated solutions which includes design, application, manufacturing and actual integration of precision conveying systems, a real growth market of course. The deal is quite significant at a $485 million price tag which according to the company is equivalent to 15.5 times EBITDA, suggesting a $31 million EBITDA contribution, and marking a big premium to the overall valuation of Columbus. Key clients of Dorner include Amazon (AMZN), Abbott (ABT), Thermo Fisher (TMO), and Nestle (OTCPK:NSRGY), among others.
Revenues for the acquired activities are seen at $125 million this year which reveals roughly 25% EBITDA margins as the company has reported a 12% revenue compounded annual growth rate over the past five years.
By the time the deal was announced shares of Columbus has risen to $50 already as shares only displayed a modest positive reaction to the deal announcement. At these levels the company was awarded a $1.25 billion valuation, close to 10 times EBITDA and roughly 1.4 times normalized sales. Dorner comes at a much steeper price at nearly 4 times sales and 15.5 times EBITDA, yet it has a bitter growth profile of course.
This deal is very significant of course as the deal is equivalent to 40% of the unaffected enterprise value and has a much smaller revenue contribution from the get go. Net debt, excluding an equity issuance, will jump quite a bit over the half a billion mark, as this will increase near term leverage ratios to roughly four times. However, improved operating performance should reduce this to three times as an equity issuance is envisioned as well. As the company is set to raise $150 million in equity, I peg leverage at just $400 million which seems manageable with 2019 EBITDA at nearly $150 million.
With no major impact on earnings per share seen based on normalized 2019 numbers around $2.50 per share, the balance sheet will see some leverage at first. If we look at the 2019 number, we see that compared to early 2020 the multiples have risen from 16 times earnings accompanied by 1 time leverage, to roughly 20-22 times earnings here while leverage will increase to 3 times.
This makes that expectations have risen a lot, yet quite frankly it seems that the company has made a good deal here as the company demonstrated on solid operational execution in 2020 despite the harsh conditions. Hence, I'm somewhat optimistic on the firms as this is a big deal. On the other hand, expectations have risen a bit over the past year while the company has been hit hard (in the near term).
A Final Word
Following the discussions above, I'm constructive on the company and its ambitions, which is now backed up by a huge and strategic deal. That said, quite some good news has been priced in, and while I'm not attracted to the shares at this moment (with other sub sectors seeing fierce sell-offs), I am placing Columbus on my watch list.
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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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