NACCO Industries (NC) with a stock price of $73 and market cap of $454 million (as of mid-September) recently announced a plan to spin-off its housewares-related business to NACCO shareholders tax-free. Hamilton Beach Brands (expected to trade as HBB) would include a majority of NACCO’s current revenue, leaving behind the much smaller coal business, The North American Coal Corporation. We expect the spin to take place prior to year-end.
American Coal (NACoal) mines and markets coal for power generation and steel production through developed mines located in North Dakota, Texas, Mississippi, Louisiana and Alabama. On the housewares side, Hamilton Beach Brands designs small kitchen appliances such as bread makers, coffee makers, blenders and juicers, while Kitchen Collection (KC) operates Kitchen Collection and Le Gourmet Chef retail stores in factory outlet and traditional malls across the United States. This is not the first spin-off we have seen from NACCO. Spin-Off aficionados will recall NACCO’s 2012 spin of Hyster-Yale (HY), a lift truck and materials handling business.
Hamilton Beach Brands (HBB) designs, markets, and distributes a slew of small electric household appliances. Its portfolio includes blenders, can openers, coffeemakers, air purifiers, food processors, irons and toasters, sold under the Hamilton Beach, Proctor-Silex, Eclectrics, and TrueAir brands.
It also offers appliances licensed under the Melitta and Jamba brands, and caters to bars, restaurants and hotels with a commercial lineup of drink mixers, glass washers, and hair dryers. The Kitchen Collection (KC) is a specialty retailer that sells discounted cookware, bakeware, small appliances, cooking gadgets, gourmet foods, and decorative items to consumers. It operates under the Kitchen Collection and Le Gourmet Chef banner through more than 300 stores, located in factory outlets as well as retail malls, dotting 40-plus states, as well as through the Internet.
U.S. companies that have been spun off from their parents are beating the S&P 500 by another wide margin this year, and a basket of them tracked by Bloomberg surged to a record in late August. The Bloomberg Spin-Off Index is up more than 20% year-to-date (through mid-September), vs. 12.2% for the S&P 500. One of the top performing among them has been Ferrari (RACE), which has raced 103% higher this year. Ferrari was highlighted here (see “Ferrari – Fiat = Accelerated Margins,” MT April 2016) at about $35 per share. Spin-offs are often overshadowed within a larger, diverse parent, which can trade at a discounted valuation because investors do not necessarily want exposure to all the disparate business units.
NACCO Sum-of-the Parts Valuation
Our estimated target price for NACCO industries stands at $100 per share, implying a potential upside of nearly 40% from the mid-September price of $73 per share (see “Addition by subtraction,” above). NACCO Industries (Stub) $32.
We value the coal business at $32 for every NACCO share. This is based on a 2018 estimate P/E multiple of 8X and 2018 estimate of implied EV/EBITDA multiple of 4.8X. Our fair value estimate for Hamilton Beach Brands (spin-off) is $34 per share ($68 per NACCO share based on a 2:1 spin ratio). Our Hamilton Beach Brands valuation is based on a 2018 estimated EV/EBITDA multiple of 10.8X.