Hillenbrand (NYSE:HI) Is An Undervalued Midcap With A 2.5% Yield

Hillenbrand, Value Is Where You Find It

In light of the newly developed narrative of value versus growth, I find Hillenbrand (NYSE:HI) an attractive midcap. The company’s business is a bit unusual, it is a blend of industrial services and plastic molding services along with a healthy dose of end-of-life products. Caskets, urns, and the like. I forget who said it or where I read it but EOY is one of those businesses that will always have a market, just like the barber. As for the industrial end of things, the company is still experiencing some weakness in relation to its Advanced Process Solutions business but acquisitions and strong demand in the other segments are supporting business. The takeaway for investors is that this stock is undervalued, pays a great dividend, and is on the brink of completing a major reversal.

Hillenbrand Beats Consensus, Guides Higher

Hillenbrand reported a great quarter if one largely fueled by acquisition. The top-line revenue grew 42.8% YOY to $693.7 million on the acquisition of Milacron, a manufacturer of plastics processing equipment. On an organic basis, revenue declined -2.0% but much less than expected, about 1000 basis points to be exact. On a segment basis, Advanced Process Solutions is the only weak spot. Sales in that segment, the company’s largest, fell by -6.0% while others saw moderate to robust growth. The Molding Technology business saw its revenue grow 17% YOY while the Batesville arm (funerary supplies) grew 8.0%.

Moving down, the company saw sequential and YOY improvement to its operations. The gross margins expanded 35 basis points over the last year while EBITDA margins a more robust 240 bps. The EBITDA margin is up 20.3% on a YOY basis and fueling strong gains in net-cash from operations and free-cash-flow. The net cash from operations nearly doubled from the YOY period while FCF runs near 90%.

The bottom line carries the only blemish in the report but it can be overlooked. Non-cash impairment charges related to its recent acquisition cut $62 million from the GAAP earnings driving a slight loss of ($0.09) and a big miss versus the $0.60 consensus estimate. The adjusted earnings are a different story. On an adjusted basis EPS came in at $0.92 to top the consensus target by $0.36.

The company is expecting strengths to continue into the first quarter of the year. The company’s backlog grew to $1.23 billion in the plastics business driven by the Milacron acquisition and some large orders in Molding Technology. Guidance for the quarter calls for a (1%-4%) decline in net revenue due to lingering weakness in the APS segment but plastics is expected to grow 2% to 5% and Batesville by low double-digits. In terms of EPS, the company is expecting $0.65 to $0.75 in adjusted earnings versus the $0.42 expected by the analysts.

Hillenbrand Is A Good Value With Great Yield

Hillenbrand is trading at 13X this year’s earnings and only 11X next years making it a deep value relative to the broad market. Considering the S&P 500 is only yielding about 1.75% it is also a high-yield opportunity with some distribution growth in the forecast. The company is only paying about 34% of the fiscal 2021 consensus (lower based on the Q4 strength and Q1 guidance) and the balance sheet is in great shape so there is room. The only catch is the CAGR which is pretty low. The company has been increasing for the last 12 years but at a tepid 1.5% CAGR. If you are looking for dividend stability this company has it, if you are looking for robust distribution growth it’s time to move along. 

Turning to the charts, shares of Hillenbrand have had a good recovery since hitting the March lows but have yet to break out to new post-correction highs. That said, it looks like this stock is going to at least make an attempt to break out. If the breakout is successful this stock will have confirmed a Head & Shoulder reversal that could take it up another $16 to the $50 level. A gain of 50%.