Hillenbrand: Does Manufacturing Equipment Need Consolidation?
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Over time, most industries tend toward consolidation. One ambitious player does a “roll-up,” buying out smaller rivals, there are other moves in response, and within a short time there are just a few big players instead of lots of little ones.
Process engineering, the equipment that runs factories, has resisted this. The machines that move material through a plant are highly specialized, and thus the Process Equipment Manufacturing Association consists of lots of small players, very few of them publicly held.
A few years ago, a casket company called Hillenbrand (NYSE: HI), based off I-64 between Indianapolis and Cincinnati, began moves meant to change that. The head of its Batesville caskets unit, Joe Raver, had gone to a company called K-Tron, which makes the kind of equipment that feeds materials through manufacturing plants. Hillenbrand bought K-Tron for $432 million, but they were just getting started.
In short order, they spent $240 million to buy Rotex, which makes industrial screening equipment. Then last month they dropped $545 million on Coperion Gmbh, a German company that also makes material handling equipment, which included $87 million in assumed debt.
That's $1.2 billion in acquisitions. Long-term debt went from zero in 2009 to over $400 mllion in 2011. The debt-to-assets ratio is now down to a more-manageable 25% and management says it is, as they say, “hungry for more” deals.
The question investors have to ask is, who is driving this train? I see ambition, and I see deals, but I don't see a strategy. I also don't see a management team I can trust for the long haul.
The company's namesake, Roy Hillenbrand, is 77. CEO Kenneth Camp is 67. Independent Vice Chairman James Henderson, whose experience at Cummins Engine indicates he might have industry knowledge, is now 77 and leaving the board. (He was still buying HI shares as recently as last month, though.)
Which brought me back to Raver. He was running K-TRON, and is now listed as president of the process equipment group. Raver has been accumulating stock grants from Hillenbrand since 2009 and has sold almost 30,000 of those shares in that time, although he still holds about 100,000.
If you're looking for a hero at Hillenbrand, my guess is his name is Raver. But we don't know. The company has announced no major changes at the top. Raver is, however, running the group that includes most of the company's operating units, responsible for most of the company's sales and earnings. He is also, still, in his mid-40s. Regardless of whether he's given a promotion, he's a key man.
Most players in the manufacturing equipment space either have it as a subsidiary or they're small, home grown companies.
Cognex (NASDAQ: CGNX), which is a favorite among the manufacturing and testing group of companies, was up nearly 4% in trading on January 1, about the same rise achieved by HI. But they specialize in machine vision, not material handling machines. They may be complementary to what HI does, but they are actually considerably smaller.
If HI management has vision, if they're aiming at a new generation of factory automation, they might make a good fit. But it's CGNX that has the vision, in the form of CEO Robert Willett, who joined from Danaher, a big testing and measurement outfit. Testing, measurement and factory equipment start to sound like an integrated manufacturing equipment play.
But that's a long way away. If you do believe in that kind of vision, or see consolidation within process equipment as being a good thing, HI is a good way to play it. Right now, investors can buy a yield of 3.34%, and the shares have been on a roll since October, when the Coperion deal was announced.
DanaFBlankenhorn has no positions in the stocks mentioned above. The Motley Fool owns shares of Cummins and Hillenbrand. Motley Fool newsletter services recommend Cognex, Cummins, and Hillenbrand. 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!