This morning we were happy to see that Hillenbrand Industries (HB) was splitting itself up. The company had two entirely unrelated segments: medical technology under the Hill-Rom name, and caskets under the Batesville Caskets name. About the only commonality was that there’s a good chance you will eventually use the second brand whether you use the first brand or not. This was on our radar for some time and we anticipated this after the review was telegraphed last year.
Roughly 1/3 of the company revenues and profits are derived from the funeral related operations. The other 2/3 from th Hill-Rom brand is divided with real medical products sales and with hospital bedding and furniture for patients and around surgeries.
The problem is that the combined operations trades at almost 21-times forward earnings, a premium to the S&P that is now magnified because of the 10% stock rise. Neither business has a lot of sex appeal. When we started evaluating this in 2006 shares were roughly $55.00. We had left this one on the back burner earlier this year because we came up with a rough estimate value that may be only a little north of $60.00. Sure, the market is higher and the company has now made its split up announcement. But since we operate on a market neutral strategy with the 10% market rise and the $67.00 price here today, this one just looks much closer to being fully valued.
It’s always possible we are being far too conservative and that the companies will be able to fly onward and upward as independent operators. We often undershoot on these perceived valuations even in a "private equity gone mad" world. But a conservative investor would at least lock in some of the gains now that the stock is close to all-time highs.
Jon C. Ogg
May 10, 2007
Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.
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