HI - Hillenbrand: Looking To Continue Buying Into Growth Markets

2023-03-08 10:37:17 ET

Summary

• Hillenbrand, Inc.'s recent Food & Recycling acquisitions are off to an encouraging start.
• Plastics business also sees increasing global demand.
• Hillenbrand intends to double down on high-growth areas. Management needs to buy right to ensure significant synergies can ensue as a result.

Intro

We wrote about Hillenbrand, Inc. ( HI ) back in June of last year when we stated that the company needed to allocate its capital better. Taking recent events into account where we have seen the multi-million divestment of Batesville (turning Hillenbrand into a pure-play Industrial outfit), it will be interesting to see if Hillenbrand can report above-average returns on the upcoming companies it will buy.

What is definitely evident from Hillenbrand's financials is that recent acquisitions in the Food & Recycling space have outperformed thus far from a demand perspective. On the recycling side, the Herbold purchase has demonstrated the need for more investment in this area, which is encouraging. The Food segment also continues to outperform, with the added value from using both the LINXIS & Coperion technologies in unison continuing to attract customers in this space. These trends, strength in plastics as well as solid organic growth from Hillenbrand's APS segment, drove sales from continuing operations higher by 16% compared to the same period of 12 months prior. Furthermore, the backlog (driven by APS strength) grew by 14% and now comes in at an ultra-elevated level of $1.96 billion.

Technically, shares continue to try to take out long-term resistance, and we would like this to happen before initiating any long position here. As the CEO mentioned on the recent earnings call, the new-look Hillenbrand is a far more focused outfit that solely will double down on high-growth opportunities with its investing dollars. Therefore, given the company's present forward non-GAAP 2024 earnings multiple of 12.84, investors may like the new-look Hillenbrand from the long side, especially given the CFO's improved guidance which now sees adjusted EPS growth of 30%+ on a continuing operating basis for fiscal 2023. Apart from the technical breakout, however, we would be cautious to solely focus on Hillenbrand's forward-looking fiscal 2024 P/E ratio for the following reasons.

Growth Projections

We always must remember that the market is a forward-looking mechanism that is constantly trying to figure out what the respective company's earnings will be in, say, 12 to 18 months' time. In fact, if the market remains encouraged by Hillenbrand's forward-looking fundamentals, we should see a breakout as alluded to earlier in the above technicals. However, despite the 18%+ bottom-line growth estimate for next year, that $3.72 per share number has been falling, which is concerning, to say the least. In fact, the estimate has dropped over $1 per share since the start of the year, so we need some stability here to ensure shares do not lose momentum.

Now, sometimes, Wallstreet will not unduly punish a stock solely on the base of declining forward-looking growth. However, this is when the company has a very strong balance sheet and an ultra-low valuation. In Hillenbrand, Inc.'s case, for example, the "need" is there to essentially finish what it has started in the new areas it has ventured into. The company knows it needs to continue acquiring aggressively. Top-line growth in the most recent quarter, for example, came primarily as a result of previous acquisitions the company has made.

Then you have the company's debt load, which means Hillenbrand's interest expense makes up a sizable portion of the company's operating profit. This means any meaningful reduction in the company's expected forward-looking profits will obviously have ramifications for how aggressive the company can be with future acquisitions.

Volatility

Buying the right companies in a hot industrial environment can do wonders for earnings, and we have seen this over the past few years in Hillenbrand. Operating profit in the company more than doubled, from $199+ million in fiscal 2020 to come in at $415 million at the end of fiscal 2022. This means operating margins moved up significantly, with top-line sales growing by a mere 17% in this time period. However, given the volatility of Hillenbrand's earnings, many times (due to how earnings can either expand or contract in a given year) it is better to take one's valuation off the company's sales numbers, which are far more stable. To this effect, Hillenbrand's sales are expected to grow by just over 4% next year, which means the company's 2024 forward sales multiple comes in at 1.13. This is a multiple that does not scream of any significant undervaluation in the stock at present.

Conclusion

To sum up, becoming a core fundamental outfit is expected to reap dividends for Hillenbrand, Inc. in the long run. In the right trading conditions, considering aftermarket growth and stronger margins, Hillenbrand shares can definitely rally from present levels. For now, though, we prefer to wait on the sidelines to see if Hillenbrand, Inc. shares can gather the necessary momentum to rally above long-term overhead resistance. We look forward to continued coverage.

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