Tony Anderson
of stocks Master Brand Co., Ltd.NYSE:MBC) It was recently reported that North America's largest residential cabinet manufacturer has strengthened its market position with the acquisition of Supreme Cabinetry Brands. As of late 2022, it has become an independent entity.
While Masterbrands' P/E ratio is not that great, the overall industry P/E ratios are relatively low, so there are a lot of variables at play. That said, I'm not automatically following the stock here, but I would be interested to learn more about the stock's prospects after recent trading.
About Masterbrand
Founded in 1954, Masterbrands is North America's largest residential cabinet manufacturer. Owning brands such as Aristokraft, Kemper, Diamond, Mantra, Schrock and Starmark Cabinetry, the company employs more than 12,000 people and manufactures and distributes cabinetry from more than 20 factories to a variety of channels, including more than 4,000 dealers. Dealers account for half of sales, and the company serves retail customers (with stock products and semi-custom solutions) and builders directly.
A $2.5 billion business pre-pandemic, sales peaked at $3.3 billion due to the COVID-19 outbreak and inflation, but a reversal in demand and pricing power has seen sales fall to $2.7 billion in 2023. Of course, rising interest rates and the accelerated pace of remodeling due to the pandemic have hurt demand for both new homes and repair and remodeling work.
Despite declining sales last year, the company was able to grow its EBITDA margins from low double digits to the mid-teens — a real achievement amid strong sales pressures, and one that's arguably helping to boost the stock price in a challenging, high-interest rate environment.
Note that Masterbrands was spun off from Fortune Brands in late 2022. The stock began trading around $10 and was trading in single digits in the first half of 2023 as investors were concerned about the impact of rising interest rates. The stock has risen steadily, hitting a high of $19 per share in March and currently trading at $16.
Valuation increase
Masterbrands in February reported that its 2023 sales would fall 17% to $2.73 billion, but the company managed to increase its gross margin by more than 4 percentage points to 33% of sales amid easing inflationary pressures.
The company was very profitable, with GAAP operating income of $306 million, and even after a $25 million restructuring and amortization charge, GAAP earnings were $182 million, or $1.40 per share. Adjusted earnings were $1.49 per share, mostly small adjustments related to restructuring charges, with earnings in this segment down from $2.02 per share in 2022 amid severe pressure on sales.
Net debt was reported at $558 million, but the company made significant progress in reducing net debt during the year, resulting in a leverage ratio of 1.5x based on adjusted EBITDA of $383 million.
For 2024, the company expects revenue to decline low single digits. Adjusted EBITDA is expected to be between $370 million and $400 million, and adjusted earnings per share are expected to be between $1.40 and $1.60, roughly consistent with 2023.
With 130 million shares trading at $16 per share, the company has an equity value of nearly $2.1 billion and an enterprise value of roughly $2.6 billion. This values the company at roughly 1x sales and just under 7x EBITDA, certainly not very demanding multiples.
The company said in early May that first-quarter sales fell nearly 6% to $638 million and net debt remained flat at $554 million, but it kept its full-year outlook unchanged.
Substantial transaction
Masterbrands took advantage of its reduced leverage profile, announcing a deal in late May to acquire Supreme Cabinetry Brands from GHK Capital Partners LP for $520 million in cash. Factoring in a net present value of $25 million in tax benefits, the deal is expensive, valued at 8.9x EBITDA. However, including expected annual synergies of $28 million, the acquisition multiple falls to 5.9x EBITDA, implying an EBITDA contribution including synergies of $84 million.
The deal, expected to close in the third quarter, will double net debt to just over $1 billion, but again, taking into account EBITDA accretion, will only increase leverage to about 2.5x. The deal will allow the company to fill a gap in the premium segment and add bath products to its product portfolio.
Additionally, $28 million in actual synergies are expected in year 3, mostly from business operations and some from supply chain and process improvements. While it will take three years to fully realize the synergies, most of the synergies will be realized in the first two years.
What next?
The Supreme acquisition price is roughly one-fifth of Masterbrand's enterprise value, making this a sizeable acquisition, and of course leverage will be somewhat increased as the acquired business's EBITDA is unreported and complicated to model, and Supreme's revenue numbers are not publicly available.
That being said, the company expects unknown accretion from the current $1.50 per share figure, and while the stock is trading at just 10 times earnings and will likely go below that, leverage ratios will increase towards 2.5 times EBITDA here.
While these multiples seem very modest, this is true for multiple operators in this industry. American Woodmark (AMWD), The company, which makes kitchen and bathroom cabinets, is a strong competitor. It faces similar headwinds as Masterbrand and expects 2023 sales to fall 11% to $1.85 billion, but EBITDA margins were just over 13%, similar to Masterbrand's. With an enterprise value of $1.7 billion, it trades at just under 1x sales, roughly in line with Masterbrand's valuation.
In this climate, with the share price having doubled over the past year, I'd like to learn a bit more about the recent transactions and the company. While the stock is interesting enough to merit my attention, before I reconsider my neutral position (albeit at a modest valuation), I'd like to learn more about the business and its recent transactions.
