Hillenbrand's German Acquisition Continues Transformation

By Will Ashworth | December 03, 2012 AAA

Hillenbrand (NYSE:HI) announced December 3 that it completed its acquisition of Stuttgart-based Coperion Capital GmbH for $545 million. Coperion is a world leader in compounding and extrusion systems; it's the third biggest acquisition Hillenbrand's made since 2010. Hillenbrand was spun-out from Hill-Rom Holdings (NYSE:HRC) in April 2008. It began its independence with one operating business in the Batesville Casket Company. In 2010, it created a growth strategy that would see it go from one operating platform to three by 2016; it's halfway there. I like the transformation. Here's why you should buy its stock.

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Growth Strategy
In its 2010 annual report, CEO Kenneth Camp outlined the reasons Hillenbrand expanded beyond burial and cremation products. While Batesville provided stability and cash flow, it also was limited in its growth opportunities. Therefore, it had to go out and find other opportunities for increasing shareholder value. After an exhaustive 18-month search, it acquired K-Tron International, a materials handling firm for $447 million including debt and transaction expenses. Its long-term goal is to consistently increase shareholder value at a rate exceeding the weighted average cost of capital. In Hillenbrand's opinion, the generation of cash is what the most important number is. On Sept. 1, 2011, it acquired Rotex Global, LLC, for $240 million in cash. Adding the manufacturer of dry material separation machines, the Process Equipment Group (PEG) segment was by then responsible for 25% of Hillenbrand's overall revenue. With the acquisition of Coperion in December, the PEG segment will generate over 60% of its overall revenue in 2013. Combined, the two platforms are expected to deliver $1.6 billion in revenue and adjusted earnings per share between $1.82 and $1.92. Since the creation of PEG of 2010, its EBITDA has gone from $11.7 million in fiscal 2010 to $76 million at the end of September 2012. Its growth strategy from 2013 through 2016 is to grow Batesville and PEG organically, add some tuck-in investments for PEG and create a third platform through a potentially larger acquisition. I wouldn't be surprised if that were to happen in 2013.

Shareholder Value
The important thing in any transformation is to create shareholder value. The year before Hillenbrand was spun-off from Hill-Rom in 2008, it generated $111.7 million in free cash flow; in 2012 it was $117.3 million. I know that doesn't seem like a big deal but remember that Batesville Casket is operating in a slow-growth industry. In the last five fiscal years the casket business has seen revenues drop from $667.2 million in 2007 to $606.8 million in 2012 while its operating profit has gone from $155.6 in 2007 to $126 million today. Pardon the pun, but the casket business is slowly dying. Not tomorrow mind you, but eventually a large percentage of the population will be cremated, which results in lower margins. While Batesville's return on assets are high - Batesville's assets represent one-quarter of Hillenbrand's total while EBITDA is double PEG segment - revenues and profits are heading in the wrong direction. By redeploying some of Batesville's cash flow in the PEG business as well as another platform yet identified, shareholders stand a better chance of continuing to benefit from Batesville's consistency.

Stock Price
Hillenbrand's stock has done very little since its spin-off in 2018 gaining just 13.2% including dividends. However, when compared with the SPDR S&P 500 (ARCA:SPY), which has gained 13.8% during the same time, it's really not that bad. Looking forward I'm not the only one who sees a transformation that not only makes sense but is essential to its long-term survival. The November 30 episode of Jim Cramer's "Mad Money" on CNBC had a caller ask about Hillenbrand. Cramer said it's a buy but only after a pullback in the stock. Up 14.4% in the past three months compared to the S&P 500, which was flat, I can see why he wants you to wait. Long-term its stock's been trading in the $18 to $24 range. With a 3.6% dividend yield and trading just slightly above $20, I'd be tempted to buy before the ex-dividend date in mid-December.

The Bottom Line
Hillenbrand's acquisition of Coperion puts its transformation on solid footing. While investors don't know what the third platform is going to be at the moment, it likely won't be anything too far removed from what it's already doing. For instance, I wouldn't expect it to buy an apparel company. If you're an income investor the company will pay you to wait to find out. If you don't like what you hear at that point you can always sell your shares. Until then, enjoy the dividend.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

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