Hamilton Beach Brands Stock: Cooking Up Value On The Selloff (NYSE:HBB)

Hamilton Beach Brands (HBB) is a leader in kitchen appliances along with commercial products for the food industry across its brand portfolio. The houseware segment, in particular, got a boost during the pandemic with consumers cooking more at home while also benefiting with connection to the strong housing market. That said, the challenge over the last few quarters has been ongoing supply chain disruptions and cost pressures which follow the headline-making macro themes. Indeed, shares of HBB are down by more than 30% over the past year with some more recent weakness amid the broader stock market volatility. Still, we think HBB looks interesting following this selloff with the company supported by overall solid fundamentals including recurring profitability. An effort to expand its e-commerce strategy and pursue growth in international markets highlights a positive long-term outlook.

HBB Financials Recap

Ahead of the company’s upcoming Q4 earnings report expected in late February, it’s worth revisiting the Q3 results reported back in November. Hamilton Beach reported EPS of $0.41 which reversed a loss of -$0.15 in the period last year. The improved profitability was driven by the top-line momentum with sales climbing 42% y/y to $157 million. While the gross margin at 21.2% was a notch lower compared to 21.4% in Q3 2020, an effort at cost control was evident as SG&A was down as a percentage of revenue.

The story has been the strong consumer demand compared to the depths of the pandemic adding to the topline momentum. Q3 also saw a recovery from commercial product segments with restaurants and the hospitality industry reopening in force since the second half of 2021. Through the first nine months of 2021, revenues at $461 million were up 25% y/y while EPS from continuing operations at $0.64 are up from $0.34 over the period in 2020.

Operationally, there were some strong points. The company notes that revenues in Latin America “more than doubled” along with strong momentum in international commercial segments. Expanding beyond North America remains a strategic priority for the company. Furthermore, nearly 35% of total sales are now coming from e-commerce channels and the company sees room for further upside.

It’s worth noting that with data from 2020, approximately 51% of total business was related to its two largest customers between Walmart Inc. (WMT) as its largest direct customer at 33% of the business including from its brick-and-mortar operation followed by Amazon.com, Inc. (AMZN) at 16% of sales. This considers that these two companies are the largest in retail. Our interpretation of this relatively high concentration is a positive for the company because it represents good visibility to its products.

While the company is not providing specific earnings targets, comments from management likely ended up souring the market sentiment, explaining some of the stock price weakness since the report. There is a dynamic that Q3 2020 last year faced a transition to a new internal software system that ended up moving some sales into Q4. This will set up some tougher comps for this upcoming quarter. Together with what was a strong end to 2020 boosted by stimulus spending at the time, management is guiding flat to slightly lower revenue this quarter which will depend on inventory availability.

A big theme for Hamilton Beach brands has been logistical issues. In Q3, the top-line growth sort of masked some of those issues but the impact here ends up hitting margins which would have been better. Management expects the disruptions to continue through the first half of 2022. From the earnings conference call:

Our largest obstacles to maximizing our business continue to be the supply chain issues, which we expect to persist at least through the first half of 2022. Our suppliers continue to struggle to keep up with the demand due to power outages and sub-supplier issues among others.

The main transportation challenge is the ability to secure ocean carriers at a reasonable cost. Like others, we have a contracted container rate. But like every company, we have not been able to secure all of our needs at the contract rate… Transportation lead times also have increased. We believe we have pivoted well and we’ve adjusted our order patterns accordingly.

The company ended Q3 with net debt of $113 million. Considering EBITDA over the last twelve months at $45 million, net debt to an EBITDA leverage ratio of 2.5x is stable in our view. A balance sheet financial current ratio of 2.0x highlights good liquidity. Notably, HBB pays a quarterly dividend of $0.10 which yields 3.1% and represents an annual payout of around $5.5 million. The company has increased the dividend rate in each of the last 3 years. We believe this payout is safe for the foreseeable future.

HBB Stock Price Forecast

The attraction of Hamilton Beach is its globally recognized brand name that carries a reputation of quality. While trends in retail sales play a role in driving demand for the company; there is a certain aspect of kitchen appliances that make them more of a consumer staple compared to typical discretionary items. Simply put, products like coffee makers, toasters, blenders are often essentials for the kitchen.

The company is supported by resilient trends in consumer spending along what remains a hot housing market. Anecdotally, anyone buying a home or moving into a new place often looks to replace these types of goods which support a growth runway for the company. There is also a view that home-cooking has gained importance since the pandemic as a tailwind for the products category.

In terms of valuation, HBB has a current market value of $191 million or an enterprise value of $305 million. An EV to EBITDA multiple of just 6.6x or EV to revenue at 0.4x are both currently at the lowest level for the stock over the past 5 years outside of a pandemic crash in Q1 2020. Our take is that the company is simply undervalued considering what remains a positive long-term outlook beyond the quarterly noise.

The upside here is really that the company can continue to generate growth which will come from both the core U.S. market and increasing penetration internationally. Looking ahead, the potential that supply chain conditions improve will support margins to normalize and trend higher which can be positive for the stock.

Is HBB a Buy, Sell, or Hold?

Recognizing the challenging market environment and some near-term headwinds for Hamilton Beach Brands, we are bullish on the stock as a high-quality small-cap with an attractive dividend yield. We rate HBB as a buy with a price target for the year ahead at $18.00, representing a 9x EV to EBITDA multiple which would pull HBB back towards its historical average for the metric. Our price target always implies the dividend yield can tighten towards a 2.2% dividend yield which also has precedence to trends from recent years.

In terms of risks, the company will be exposed to high-level macro trends. Weaker than expected sales or the potential of deteriorating consumer spending against high inflation can force a reassessment of the long-term outlook and open the door for another leg lower in the stock.

While a date has not yet been confirmed, Hamilton Beach Brands’ Q4 earnings report is expected in late February. We sense that strong consumer demand into the holiday season particularly given the placements that HBB products have on key platforms including Walmart and Amazon will translate into a solid top-line result. Positive comments from management can be a catalyst for the stock to regain momentum.