Hamilton Beach Brands: Early Signs Of Improvement Are A Start

Bill Diodato From my experience, some of the best opportunities out there are the kinds of companies that you wouldn’t expect to see upside from. The electric household appliance industry, for instance, really isn’t all that exciting. Many of the products have been around for decades, with only small improvements made to them over time. It is a highly competitive space that suffers from low margins. Even so, that didn’t stop me from recognizing the opportunity that was Hamilton Beach Brands Holding (NYSE:HBB) when I first wrote about it in April 2022. At that time, citing how undervalued shares appeared, I ended up rating the company a ‘buy’ to reflect my view that shares would likely outperform the broader market for the foreseeable future. From that time through today, the stock is up a whopping 92.3%. That’s almost quadruple the 25.7% move seen by the S&P 500 over the same window of time. To be clear, I have not always been bullish about the firm. In fact, in February of this year, I ended up downgrading the stock to a ‘hold’ to reflect my new view that shares would likely fail to outperform the broader market. So far, that has proven to be correct as well, shares are up by only 3.7% since then, which is far below the 7.9% increase seen by the market. Given the time that has passed, I figured it would be a wise idea to revisit the firm and see how things have changed. What I have noticed is that, while shares remain cheap, there has been some improvement on the bottom line. Recent revenue suggests an absence of growth, but net profits and most cash flow metrics show that the company is getting healthier. With a low amount of leverage as well, this certainly bodes well for investors. But I think it is still premature to upgrade the stock at this point in time. The picture is improving When I say that Hamilton Beach Brands is showing signs of improvement, I do mean that those signs are very recent. If we look at data for 2023 relative to 2022, we won’t see much of that at all. As an example, revenue for 2023 came in at $625.6 million. That’s down 2.4% from the $640.9 million reported in 2022. Even though the company benefited to the tune of $9.5 million from increased unit volume and changes in product mix, as well as $3.3 million from foreign currency fluctuations, cuts in the prices of its products hit sales in the amount of $28.1 million. Management attributed this to robust demand in 2022 as the food service and hospitality industries recovered from the COVID-19 pandemic. So if anything, 2023 represented a return to normalcy. Author – SEC EDGAR Data On the bottom line, there was not much improvement at all. Net income remained almost flat, ticking down from $25.3 million to $25.2 million. Frankly, I find this impressive, since you would think that the drop in average sales price would have caused pressures on the bottom line. However, the company’s gross profit margin actually improved from 20.1% to 23% because of lower product costs and the aforementioned changes in product mix. Other profitability metrics were mixed. While it is true that operating cash flow went from negative $3.4 million to positive $88.6 million, once we adjust for changes in working capital, we get a decrease from $35.9 million to $33.7 million. In fact, the only major improvement came from EBITDA. It grew from $34.3 million to $40 million. Hamilton Beach Brands The most significant improvements for the company came in the first quarter of 2024 relative to the same time last year. While it is true that sales remained flat at about $128.3 million, there was actually a $12.2 million benefit associated with higher unit volumes and changes in product mix. This was offset by average sales price declines totaling nearly $13 million. And the gap between the two to get flat revenue was from foreign currency fluctuations. Author – SEC EDGAR Data Even though revenue could have been better, it is great to see an improvement instead of a decline. Furthermore, the company’s bottom line is showing some strength. In the first quarter of 2023, Hamilton Beach Brands generated a net loss of $4.8 million. That loss was cut significantly, coming in at only $1.2 million this year. Operating cash flow was slashed from $34.9 million to $19.7 million. But after we adjust for changes in working capital, we get an improvement from negative $3.2 million to positive $3.2 million. Over the same window of time, EBITDA for the company expanded from negative $4.1 million to positive $0.2 million. Much of this improvement came from an expansion in the company’s gross profit margin from 16.3% to 23.4% as lower product costs and changes in product mix helped the company immensely. Hamilton Beach Brands Unfortunately, we don’t really know what to expect for the rest of this year. But there is some reason to be optimistic. Management has not really provided much in the way of details. But they did say that revenue should ‘increase modestly’ compared to what was seen last year. And operating profits should ‘increase moderately’ as well. We know that management is confident in this because, on May 10th of this year, the company boosted the quarterly dividend by 4.5%. As a result, the company will now be paying out about $6.5 million a year in the form of distributions. That’s a yield of only 2.4%. But it’s better than nothing. Author – SEC EDGAR Data If we assume no improvement on the bottom line, shares of the company look attractively priced. As you can see in the chart above, shares are trading in the mid to high single digit range. This is not bad by any means. Generally, I would consider this bullish for investors. This is further strengthened by the fact that the company has only $23.7 million in net debt on its books. That makes it a fairly low-risk opportunity, even if times get difficult. Having said that, this is still a low margin space with intense amounts of competition. It is worth noting that shares are more attractive than most other similar companies. In the table below, I compared it to four such firms. On a price to operating cash flow basis, only one of the four companies I compared it to were cheaper than it. Another was tied with it. And on an EV to EBITDA basis, it was the lowest of the four firms that had positive EBITDA. Company Price / Operating Cash Flow EV / EBITDA Hamilton Beach Brands 7.9 8.6 Traeger (COOK) 4.1 57.6 Helen of Troy (HELE) 7.9 9.9 National Presto Industries (NPK) 39.2 11.7 Aterian (ATER) 20.3 N/A Click to enlarge Takeaway From what I can tell, the bottom-line improvement and the strength on the top line that allowed revenue to remain flat is encouraging for investors. But this is data covering only a short window of time. Because of how short it is, I cannot yet say that this is part of a larger trend that deserves to be rewarded. Management is currently optimistic, but things can always change. So, despite how cheap shares are and the improvement seen so far, I think that upgrading the stock is a bit premature at this point in time. Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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