Breaking Glasses Is Positive for This Stock

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If you thought selling razor blades was a good business, think about how many glasses are broken in a restaurant every month. A seller of glass beverageware benefits from high replacement sales and low price sensitivity.

Libbey (NYSEMKT: LBY) is the second-largest casual glass beverageware manufacturer in the world selling primarily to the food-service, retail and business-to-business markets. It is a stock to consider, given such significant recurring revenue from the food-service business. In addition, Libbey is attractively valued at 9.8 times forward P/E and 6.7 times trailing-12 months EV/EBITDA, respectively, making it an attractive investment candidate.

Attractive dynamics for food-service business

Libbey generates about half of its revenue from the U.S. food-service business. There are three reasons why I think this business is particularly attractive.

Firstly, most investors would have heard the argument about how a consumables businesses like selling razor blades and industrial companies providing repair and maintenance services offer stable and recurring revenue. The sale of glass beverageware has similar characteristics. Glass beverageware is easily damaged or broken with repeated use. About 90% of Libbey's annual U.S. food-service glassware sales are replacement in nature, according its most recent investor presentation.

Secondly, Libbey’s customers are usually less price sensitive. Imagine if you were an owner of a restaurant, what would be the top of your concerns when it comes to controlling costs? It will definitely be rental and labor expenses. You will be better off haggling over price with your landlord and senior managers than to squeeze the margins of your beverageware suppliers. Since glass beverageware makes up a small proportion of the total cost of running a food-service business, Libbey’s customers are more forgiving of price increases on its products.

Last but not least, the relative profitability of the output influences the price sensitivity toward the input costs. Beverages are typically the highest-margin items on a restaurant’s menu, which makes the relative low cost of glass beverageware much more bearable.

Limited threat from foreign low cost producers

In 2006, Libbey bought out the remaining stake in Mexico-based Crisa, the largest glass tableware manufacturer in Latin America. With this acquisition, Libbey’s manufacturing facility in Monterrey, Mexico helped to supply low-cost products to its U.S. and European markets. This cost efficiency is achieved with lower labor costs and the elimination of duties for the import of glassware from Mexico into the U.S. by the North American Free Trade Agreement in January 2008. In the following year in 2007, Libbey made a $52 million investment in a new manufacturing facility in Langfang, China. With these two facilities producing over half over its products, Libbey is well-positioned to compete with other low-cost producers.

Future outlook positive

Last year, Libbey announced plans to cut its professional and administrative workforce by 9% and freeze contributions to cash-balance pension plan for U.S. employees, with the aim of achieving annual cost savings of $10 million based on management estimates. Given that prices of natural gas, a key source of energy for Libbey’s glass production, are out of its control, reining in labor costs and keeping itself lean is a step in the right direction for Libbey. On the back of record sales and profitability for full year 2012, I am also positive on Libbey’s plans to further expand contribution from its international operations, which accounted for 44% of its fiscal 2012 turnover.

Peer comparison

Libbey’s peers include Apogee Enterprises (NASDAQ: APOG) and Sysco (NYSE: SYY).

Similar to Libbey, Sysco has significant exposure to the food-service market as a food-products distributor. Its clients include restaurants, hospitals, schools, and hotels. On the revenue front, it is taking advantage of the fragmented food-service industry by growing revenue through acquisitions. Sysco made 25 acquisitions valued at more than $1.1 billion over the past five years from 2008 to 2012; it has already spent $979 million on 11 target companies for fiscal 2013 year-to-date.

In terms of cost control, Sysco is currently in the process of implementing an integrated IT system to streamline costs. Other IT initiatives include improved data analytics to optimize product pricing and selection to reduce excess inventory holding costs. Sysco expects to realize $600 million in annual costs savings by fiscal 2015 with this technology transformation project.

Apogee Enterprises is a provider of glass solutions for commercial buildings and picture frames. Its architectural products and services meet critical needs of its customers in terms of the on-time completion of building construction, safety and aesthetic appeal. An increased emphasis on coated (energy efficient) glass also helps to drive demand for Apogee’s quality products.

Its other stable albeit smaller picture framing segment helps to offset the cyclicality of commercial construction, which affects the business of its architectural segment. Management has set a revenue target of $1 billion by 2016 through various revenue enhancement and cost-saving initiatives. These include increased Brazil architectural glass capacity, expansion of its picture framing business in Europe, equipment upgrades and increased automation.

Conclusion

I like Libbey for the attractive attributes of its food-service business and its competitive cost position. A forward P/E below 10 is a bargain for Libbey, probably the only listed glass beverageware manufacturer in the U.S. I am also positive on its revenue enhancement and cost saving initiatives for the future.


Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Sysco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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