Blount (NYSE:BLT) is the sort of small industrial company that can go unknown and unfollowed for years unless and until it gets a little attention from the financial media. Although the severe decline in residential construction has meant challenging times for this leading producer of cutting chains and other products for the forestry and lawn/garden markets, the potential offered by end-market recoveries and increased operating leverage makes this a name worth watching.
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Times Are Tough Right Now
There's not a lot of joy around Blount right now, as the stock has significantly underperformed the S&P 500 over the past year. While part of the company's trouble comes from inventory corrections at distributors, it's also well worth noting that residential construction activity is still pretty soft and that ultimately has a meaningful impact on forestry equipment demand.
Revenue fell by 8% on an organic basis in the company's second quarter, as unit volume was weak in the forestry, lawn/garden and agriculture businesses. Operating leverage was problematic, as gross margin declined about three points, feeding a 4% drop in reported operating income. On an adjusted basis, operating income did squeak out a 2% improvement from last year.
Looking to Build Leverage from Niche Markets
While Blount is not a well-known company, brands like Oregon, Carlton and SpeeCo are better known in their respective markets. In fact, Blount likely has more than 60% share of the saw chain market (with Germany company Stihl holding more than 30%), and a long relationship with Husqvarna.
While more than 20% of Blount's forestry and lawn/garden sales go to OEMs (like Husqvarna), the company has built up an impressive global network of distributors. That has allowed the company to effectively sell related products, such as chainsaw guide bars, drive sprockets and various spare parts and accessories.
Now the question is about the extent to which the company can leverage its existing manufacturing and sales infrastructure with incremental products and acquisitions. For example, the company also sells products like lawnmower blades, trimmer lines, engine parts and the like, and there is a large number of components, supplies and consummables that can be sold into the forestry, lawncare and agricultural markets.
Buy or Sell?
With its manufacturing and distribution in place, Blount has the opportunity to buy smaller companies and garner quick earnings leverage. That said, the company has a sizable debt load today and it is probable that the balance sheet is going to limit just how many and what kind of deals the company can do.
Likewise, it's worth asking if Blount would itself make a logical target. Companies like Gardner Denver (NYSE:GDI), Emerson (NYSE:EMR), Ingersoll Rand (NYSE:IR) or Illinois Tool Works (NYSE:ITW) could all look at Blount as an opportunity to expand their professional tool offerings.
Waiting on the Recovery
While Blount has been looking to expand its non-forestry businesses, forestry still accounts for a majority of the company's revenue. With roughly 50% of forestry harvest demand tied to residential construction, the level of housing construction is clearly significant and forestry companies like Plum Creek Timber (NYSE:PCL) and Weyerhaeuser (NYSE:WY) have definitely seen lower harvest/demand levels.
Time should heal this wound; current housing construction activity is inadequate to keep pace with the growth of the U.S. population, and railroad carload volume for timber and lumber has been improving. As that recovery takes shape, demand should improve for Blount and allow the company to couple ongoing cost-reduction efforts with better revenue and capacity utilization.
The Bottom Line
Blount has a significant amount of debt, and that certainly adds to the risk of a small industrial company investment. Likewise, the company's business is relatively concentrated. On the plus side, full-year margins have stayed in the double-digits throughout the housing bust, and the company's returns on capital haven't been bad. While Blount is not going to be a quick multi-bagger, patient investors ought to keep an eye on this under-followed industrial company for its growth and recovery potential.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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