Summary
- Blount achieved revenue growth of 6.3% during its latest quarter. Earnings grew by 113%.
- The market under which Blount operates is expanding.
- Growth in order backlog confirms this.
- The company is undervalued by 24%.
December 27 -- Blount International's share value has gone up by
23% in a year. The company manufactures and sell farm and forest equipment and
replacement parts for professionals and consumers in select end-markets. Blount
has been a top performer in the industry since a long time: the company's
revenue growth has averaged 13.8% over the past three years, while the industry
has seen its revenue grow at a far lesser rate of 7.5%. With the macro
environment proving favorable for the company, this trend is expected to
sustain ahead.
In this article, I will evaluate Blount's financial strength by
reviewing its performance in the latest quarter. Later, I will discuss factors
to support my quantified upside of the company.
Third Quarter
During the period, Blount achieved revenue growth of 6.3% as the
top-line figure came to $245 million. The year-over-year increase was a result
of healthy demand across most of the key markets under which the company
operates. This led the volumes under the Forestry, Lawn, and Garden
"FLAG" segment, and Farm, Ranch, and Agriculture "FRAG"
segment to surge by 7% and 5% respectively. Sales in FLAG, which is the
company's largest segment, remained unaffected by currency fluctuations during
the period, but average pricing decline of $2 million hurt the revenue figure a
little. The decline came due to a higher mix of sales to original equipment
manufacturers as well as targeted price reductions in certain geographic
markets.
Strong historical revenue growth and the results in the latest
quarter confirm that Blount's industry hasn't stopped growing yet. FLAG, which
generates 65% of the business for the company, saw its sales improve by 10.2%
in Europe and Russia, and 7.1% in North America. The performance reflected the
continued growth in demand in these markets. Sales in Asia were flat versus the
third quarter of 2013. However, the improvement in performance revealed that
the market was stabilizing in the region due to the benefits coming from better
industry-wide conditions.
Adjusted EBITDA came at $38.2 million, compared to $34.9 million
in the year-ago period. Apart from solid revenue growth, the main driver behind
was a superior cost profile achieved in part by the closure of the company's
least-efficient Forestry plant in Portland, as well as better utilization rates
in the FLAG segment.
The net result was an earnings figure of 32 cents per share,
which was more than double of what Blount achieved in 2013. Looking forward,
analysts believe that the earnings trend will sustain due to the reasons
discussed below.
Market Growth
Since Blount serves the forestry and agriculture industry
through its products, it can be said that as long as theses sectors continue to
grow, the demand for Blount's products will remains healthy. Fortunately, the
global farm equipment market is forecast to grow by 4.7% in 2015. Growth within
the global farm equipment market looks set to be driven by the booming
economies of emerging nations, the rising world population, and declining
arable land per person. Moreover, growing standards of living and increasing
personal disposable income leading to massive urbanization will significantly
drive the global demand for farming equipment ahead. Also, rising income from farms,
particularly in the US, is expected to contribute to this growth as well.
A similar trend is expected to prevail in the forestry market,
as the demand for pulp is expected to grow at a CAGR of 4.4% over the next two
years. The reason behind is that population growth will increase the need for
wood and wood-related products, including fuel wood. In addition, urbanization
will increase the demand for charcoal when incomes are insufficient to procure
alternative sources of energy.
The market conditions will ensure that Blount's top line remains
healthy in the upcoming year. The gains have already begun pouring in as the
total orders of the company stood at $168 million at the end of the latest
quarter. FLAG open orders were $136 million, and were 17% higher compared to
2013. FRAG segment's orders also increased by about 3% to $1 million.
Bottom Line
Positive industry conditions in both the markets under which
Blount operates, and strong backlog position has led the analysts to believe
that the company will deliver earnings of $1.14 per share in 2015, which will
provide year-over-year growth of 7.5% to the investors. The growth in earnings
should sustain the stock-price trend ahead.
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