2023-10-18 07:28:55 ET
Summary
- Villeroy & Boch celebrates its 275th anniversary, and because of its excellent products and the takeover of rival Ideal Standard, the company is ready to profit from industry growth.
- Villeroy & Boch achieved record revenues and near-record net profits in 2022, proving its resilience and success.
- Economic challenges and risks include a revenue decrease, inflation, and higher interest rates, but the global ceramic market is expected to grow.
- Villeroy & Boch's stock has upside potential compared to rivals, with a favorable EBITDA ratio and a reasonable CAPE.
- The takeover is also risky since the deal is valued at €600 million, but it increases V&B's market share.
Investment thesis
Villeroy & Boch (VLBOF) is a family-owned German Hidden Champion which is under the radar for many investors. Consequently, the valuation is low and offers a good risk-reward ratio. The company has shown that it could whether many economic storms in its 275 years old past. The current financial situation and the industry outlook is bright though the recently announced Ideal Standard takeover causes some uncertainties but also great growth chances. The stock seems to be a value opportunity with limited downside risks.
Company profile
Villeroy & Boch is a German manufacturer of ceramics with a headquarter in Mettlach. The company produces its products in 13 countries in Europe and Asia and sells them in more than 120 countries worldwide. In 2022 Villeroy & Boch achieved a record revenue of nearly €1 billion and net profits near all-time high. Despite economic challenges and headwinds the ceramics producer, which is primarily owned by the two founding families, has proven to be successful for centuries and to be resilient towards recessions due to innovation, financial discipline and high-quality collections.
Villeroy & Boch operates in the business segments bath and wellness, dining and lifestyle, kitchen and living. It offers several collections in its bath business consisting of very modern furniture. Furthermore, the company has added a jubilee collection to celebrate the 275th anniversary. It has become famous not only for its tableware but also for the floor mosaic of the Cologne Cathedral and the first bone China and a Luigi Colani collection. The internationalization gained momentum in the last two decades by expanding to Shanghai and Bangkok to serve the Asian markets. The company celebrated its IPO in 1990 and 14 million preferred shares are traded at the German stock exchange, London and NASDAQ OTC of which 1.6 million belong to the company.
In September 2023 Villeroy & Boch announced the takeover of Belgian rival Ideal Standard for €600 million.
Business environment and risks
2022 marked the best year for Villeroy & Boch with revenues close to €1 billion and a record dividend payout. For the first six months of 2023, the company reported a 10.7% revenue decrease, mainly driven by an economic downturn in Central Europe while other regions showed an increase in revenues. The high inflation and higher interest rates put pressure on V&B's customers who must prioritize expenditures. Despite current economic challenges, the global ceramic sanitary and kitchen furniture markets are expected to grow at a CAGR of 5.8% and 9.2% , respectively. So all in all, the chances for growth are excellent, especially because Villeroy & Boch has international branches in Asia and is strengthening its market position with the takeover of Ideal Standard. The merger will create a €1.7 billion business that can strongly profit from future growth.
A major risk is the takeover amount which represents 65% of the company's total assets of €911 million and 164% of its equity. Ideal Standard showed a 2022 revenue of €737 and an EBITDA of €73.7 (margin = 10%) while V&B had revenues of €995 million and an EBITDA of €135 million (margin= 13.6%). On the one hand, the merger strengthens its market position, on the other hand, it increases the risks of deteriorating margins. The management believes that Ideal Standard is a beneficial addition for Villeroy & Boch's business. If the plan works out, the merged company has good chances to prosper. Otherwise, the takeover will represent a high financial risk.
Another risk to its business is an economic downturn followed by decreasing expenditures for high-quality ceramic products and furniture. High inflation and high interest rates also increase the credit risk for V&B's customers. Germany faces a recession and is responsible for nearly 30% of the company's revenues. The global economy is expected to grow by 2.8% though which will partly offset the decrease in Germany. As long as global economic activity rises, Villeroy & Boch will experience a robust demand for its well-known and modern products. Furthermore, inflation will probably fall in the next two years in Europe to 2.1% in 2025 making further rate increases very unlikely and an economic recovery for Germany more likely.
Stock valuation and peer comparison
The company has 14 million outstanding preferred shares which currently cost €17,85. The total market capitalization is close to €500 million because there is an exact same number of regular shares that are family-owned. There is limited access to invest in the company for oversea investors although 88% of shares are free float. You can buy shares at German stock exchanges, in London and NASDAQ OTC or you invest in the funds that hold shares in the company (KBC Asset Management NV or Dimensional Fund Advisors LP).
There are not many companies for a peer comparison regarding valuation since not many of V&B's competitors are listed on a stock exchange. Geberit AG (GBERF) is a well-known Swiss company and Toto Ltd. (TOTDY) is from Japan.
Ticker | P/E* | P/S* | P/B* | P/EBITDA* | yield (%)* |
VLBOF | 8.9 | 0.56 | 1.36 | 4.2 | 6.7 |
GBERF | 20.5 | 4.54 | 12.30 | 14.3 | 2.8 |
TOTDY | 16.1 | 1.11 | 1.37 | 7.8 | 2.7 |
*numbers for the first half of 2023
Compared to two of its rivals, Villeroy & Boch's stock has upside potential of 85% according to the EBITDA ratio. The CAPE for V&B stands at 10 which is not expensive.
Record of earnings and dividends
Historical earnings and dividends per share for Villeroy & Boch:
year | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | CAGR |
EPS (€) | 1,10 | 1,13 | 1,27 | 3,04 | 0,86 | 2,27 | 2,69 | 16.1% |
DPS (€) | 0,53 | 0,57 | 0,60 | 0,35 | 0,55 | 1,00 | 1,20 | 14.6% |
Apart from the pandemic year 2020, V&B has continuously increased earnings and dividends with a healthy payout ratio below 50% allowing further increases. The integration of Ideal Standard as well as expected growth rates between 6-9% should boost future earnings and dividends. The current earnings yield of 11% in combination with expected growth are good conditions for future returns that are similar to the CAGR of 2016-2022. V&B has shown that nowadays, it can impressively absorb economic shocks like the pandemic which was not the case in 2009-2010 when it reported heavy losses after the financial crisis. A company that has survived for 275 years can be called a crisis management expert and qualifies its stock for a long-term investment.
The latest earnings report shows that the struggling German economy hits V&B with a revenue decrease of 15.3% in its most important single market and a total decrease by more than 10%. Total revenue will still be close to €900 million and EPS between €1,70 and €2,00 at the end of 2023 despite high inflation, economic headwinds and uncertainties. The report also mentions the increased order receipt in the first half of 2023 which is a very positive development. The Chinese market offsets lower order volumes in Europe indicating the company's healthy and balanced international strategy.
Conclusion
Villeroy & Boch is a family-owned traditional German Hidden Champion with high-quality products and the company has always reinvented itself to manage economic booms and recessions throughout four centuries since 1748. V&B operates in an industry with a bright future, expecting solid growth in various markets around the world. Sound financials, a low valuation compared to peers and stable earnings promise solid returns in the near future. However, the Ideal Standard takeover for €600 million does not come along without financial risks. It makes V&B's future success more dependent on a steadily growing global economy but also offers great opportunities to excessively profit from growth in the ceramic sanitary and kitchen furniture markets.
Recent insider trades which have been constantly high for years suggest that the management is convinced of its strategy and of the new leader Gabi Schupp who will become CEO in 2024.
All in all, Villeroy & Boch offers great value with limited downside risks, growth opportunities via takeover and a well-known brand with a long tradition.
For further details see:
Villeroy & Boch: A 275-Year-Old Hidden Value Stock From Germany