Huttig Building Products(HBP) – $4.3125 on Aug 27, 2000

I just finished entering a bunch of data such as trailing EPS and revenues. Throw it all out the window.
Huttig Building Products may be one of the most ignored, misunderstood stocks on the market, and a
big reason is that superficial analysis with readily available data is, well, too superficial. Huttig Building
Products (NYSE: HBP), spun-off from Crane (NYSE: CR) last year, is a leading distributor of building
products such as doors, windows and trim. Value investors may recognize the opportunity that so often
occurs with spin-offs. In this case, simultaneous with the spin-off, Huttig issued 6.5 million shares to
acquire Rugby USA from Rugby Group PLC. The net is that even the proxy for the spin-off was worthless
because it wouldn’t account for the acquisition. As a spin-off from an S&P 500 company, Huttig was
guaranteed hot potato status anyway. But factor in confusing offering documents and an admittedly
poor marketing job, and the stock simply could not avoid the doghouse.
The beneath-the-surface numbers follow. The leader in its very fragmented industry, Huttig has a
market share of just 8% and will earn revenues topping $1.2 billion. Razor-thin margins are offset by
industry-leading working capital management. In fact, the company has been profitable since the Civil
War. This year, the company will see about $60 million in EBITDA plus a substantial one-time gain, yet
carries an enterprise value ($89 market capitalization plus $122 million debt less $6 million cash) just
about $205 million.
As the industry’s most efficient operator (with management firmly ensconced in a shareholder-friendly
EVA compensation model straight out of Stern & Stewart), Huttig is ahead of plan to squeeze $15 million
in synergies out of Rugby as well as bring Rugby’s poor working capital management more in line with
Huttig’s other operations. Expect another $20 million to drip out of working capital within the next year.
Because of these savings, Huttig in effect paid just $40 million for Rugby’s $30 million in annual EBITDA.
While Huttig’s management should get credit, some of it must be shared with the motivated seller.
Rugby Group PLC is not the world’s best-managed company, to put it lightly.
Going forward, Huttig will have tremendous free cash flow. Free cash flow averaged $21 million per year
for the three years before the acquisition of Rugby. Now, EBITDA jumps to at least $60 million, and free
cash flow jumps to at least $35 million. Plus, in the short term, we get the $20 million or so that comes
out of Rugby’s working capital. As a result of this, during calendar 2000 Huttig is well on track to bring its
$122 million in debt down to $82 million. Management’s reasons for the debt-reduction? Reduced
interest expense and expanded ability to pursue acquisitions. So what we are looking at is an enterprise
trading at just 3.1 times EBITDA, and only about 5.1 times free cash flow. Remember – 130 years of
continuous profitability.
Management follows strict return-on-investment criteria according to Stern Stewart’s EVA theory and
model’s operations on GE’s Six Sigma program. The Chairman comes from Crane and is known to be a
shareholder advocate.

Catalyst

Sheer value is something of a catalyst here, but there are other key aspects to consider. Rugby Group
PLC holds nearly a third of Huttig’s share and is a price-insensitive seller on the market. This introduces
price risk but not business risk. The shares are not liquid, and Seth Klarman is said to have bought up to
20% of Huttig’s shares. If so, consider those shares locked up. Klarman is known as an extremely
disciplined deep value investor. Once the Rugby Group shares are on the market, look for a buyout of
Huttig. The buyout could come from inside (management) and a private market valuation based on
recent activity places the shares at a worth over $12-15/share. Again, the Chairman is a shareholder
steward – Crane investment arm still has an investment in Huttig – and would not let the takeout go
through much lower than private market value. I’m looking for action within the next year. In the
meantime, a large distributor of wholesale doors left the business. Huttig is expanding to meet the
demand. Because of this, sales may rise over the next year or two even if, as seems probable, the
homebuilding market turns south. Finally, spin-offs often reach a price nadir about one-year after the
spin-off date; it takes that long for the knee-jerk sales to stop. By early 2001, the nadir should be behind
us.

Industrias Bachoco is the $1 Billion sales leading poultry producer in Mexico, where chicken is the
number one meat. IBA is a NYSE-listed ADR that is as cheap as ever. Bachoco is the giant in an ultra-
fragmented industry.
Summary financials (in US $) and ratios as of their most recent earnings release 10/24/02 (not carried on
Yahoo news):
Market Cap $426 million
Total Cash $186 million
Total Debt $ 24 million
Enterprise Value $264 million
9 mos Net Income $104 million
9 mos OCF $127 million
9 mos Depreciation $ 23 million
* FCF roughly approximates Net income, and 2002 NI will be about $130-$140 million.
* The company has been pouring its cash flow into debt paydown after its 1999 acquisition of the
industry #4 (which smartly provided both horizontal and vertical integration benefits), and is now nearly
debt-free.
* The payout is around 25% of net income – so the dividend yield will be in the upper single digits.
Put in perspective, net income trends:
1998: 92.9
1999: 85.8
2000: 126.8
2001: 117.6
2002: roughly 130-140
* Nominal PE (Market Cap/NI) is 3.2
* EV/2001 EBITDA (will be higher this year) is 264/164 = 1.6
* Adj for net cash and related net interest, adj P/E is 264/125 = 2.1
Shareholders’ Equity is $871 million, nearly all of which is tangible.
So P/B is ~ .50
Over last 5 yrs, ROE has been between 12 and 17% despite growing cash drag.
Return on Assets has been ranging 10-15%.
IBA’s net profit margins are in the low double digits.
Comparatively, TSN and CHX, both of which have a validating presence in the Mexican market but rank
behind Bachoco, carry relative valuations 3-5X higher than IBA despite profit margins less than 2% and

poor ROE’s. Labor and costs are one major advantage at IBA, which continues to improve its operating
margin – now 11.96%.
Risks:
1) A recent Hurricane damaged production at a small portion of IBA’s farms. This is a minor, temporary
issue, but appeared to hurt the stock.
2) The company is dealing with reduced protection by tariffs, which were cut in half on Jan 1 2002 and
will be phased out completely in 2003. 2002 was supposed to be difficult because of this -helping to
depress the share price – but the company has been faring much better than anyone expected. Pilgrim’s
Pride was supposed to be a big threat here, but they keep stumbling over themselves and have a weak
balance sheet. This issue cuts the other way in a couple years ways when IBA gets to access feed at
cheaper prices thanks to NAFTA. IBA may also be able to leverage its low costs into an export business
into the US, per the CEO.
3) There is the potential that the company will lose a favored tax status, though it is unclear that this
would disadvantage it significantly in relation to competitors facing similar issues. Apparently the tax
would be a VAT, which would increase the prices consumers pay. This has been hanging over the
company for some time, also depressing the share price.
Summary: 2X free cash flow; leading market position; large scale; tremendous financial strength with no
net debt; big dividend while

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