All new material since last update is highlighted, otherwise there are no changes.
Overview
Acquisition of the privately held American Household, Inc. (AHI) for $745.6MM by Jarden Corporation (JAH) heralds another important milestone in the company’s transformation from industrial material’s manufacturer to consumer products’ company. AHI is the parent of The Coleman Company, Inc. and Sunbeam Products, Inc., leading producers of global consumer products through the BRK®, Campingaz®, Coleman®, First Alert®, Health o meter®, Mr. Coffee®, Oster® and Sunbeam® brands.
According to analysts, the AHI acquisition should be significantly accretive in 2005. In addition to a portfolio of premier brands, AHI’s international presence provides Jarden with an opportunity to expand core product lines into global markets. Management’s solid track record of repositioning the company through strategic acquisitions and timely divestments augurs well for the integration of AHI and exploitation of potential synergies.
Strengths/Opportunities / Weaknesses/ThreatsLeading market shares in niche categories. / Customer concentration.
Solid brand portfolio and brand name recognition. / Accretive acquisitions may diminish should competitors try to mimic JAH strategy and raise target prices.
Successful growth by acquisition strategy augurs well given fragmented market opportunities. / Low barriers to entry for several market segments.
Jarden Corporation is headquartered in Rye, New York, and is a leading vertically integrated provider of niche-category, branded consumer products for use in and around the home. The company uses a variety of retail distribution channels including grocery stores, mass merchandisers, department stores, value retailers, home improvement stores and craft stores. Key branded consumable customers include Albertson’s, Dollar General, Home Depot, Kroger, Lowe’s and Wal-Mart. In North America, Jarden is the market leader in several targeted consumer categories, including home canning, home vacuum packaging, kitchen matches, plastic cutlery, playing cards, rope, cord and twine and toothpicks. The company’s brand portfolio includes: Ball®, Bee®, Bernardin®, Bicycle®, Crawford®, Diamond®, FoodSaver®, Forster®, Hoyle®, Kerr®, Lehigh®, Leslie-Locke®, Loew-Cornell® and VillaWare®. Jarden also manufactures zinc strip and a wide array of plastic products for third party consumer product and medical companies, as well as its own businesses.
Jarden Corporation formerly known as Alltrista Corporation was formed in April 1993 as a spin-off from Ball Corporation. The sale in 2001 of its Triangle, TriEnda, and Synergy World plastic thermoforming businesses to Wilbert, Inc., and later Microlin, LLC, effectively divested several underperforming businesses. JAH later acquired the leading home vacuum packaging business, Tilia, in April 2002 and announced the acquisition of a leading line of branded kitchen accessories, Diamond, completed on February 7, 2003. In May 2002, they adopted the name Jarden Corporation.
Continued focus on the consumer products sector has underpinned an impressive turnaround for the company according to analysts. Despite anticipated future acquisition activity investor’s attention is now turning to the company’s ability to manage its solid brands portfolio and improve margins going forward.
Sales
The company generates revenue from four business segments: branded consumables, consumer solutions, plastic consumables, and zinc materials production.
Branded consumables (approx. 56% of 4Q04 sales): Within the branded consumables segment are four product lines: kitchen products, home improvements products, playing card products and other specialty products. Kitchen products include food preparation kits, home canning and accessories (leading North American manufacturer, distributor and marketer of home canning and related products, primarily under the Ball, Kerr and Bernardin brands), kitchen matches, plastic cutlery, straws and toothpicks. Home improvement products include rope, cord and twine, storage and organizational products for the home and garage and security door and fencing products. Playing card products include children’s card games, collectible tins, playing cards and card accessories and puzzles. Other specialty products include arts and crafts paintbrushes, book and advertising matches, institutional plastic cutlery and sticks, laundry care products, lighter and fire starters, other craft items and commercial products. The company distributes the majority of its branded consumable products through a number of in-house distribution centers and third party warehouse throughout North America.
Digest average estimates / 2003A / 2004A / 2005EBranded consumables Sales / $257.9MM / $473.1MM / $562.5MM
Consumer solutions (approx. 26% of 4Q04 sales): The consumer solutions division primarily consists of Tilia FoodSaver, a home vacuum packaging business, and US market leader in that category. The vacuum packaging business sells appliances, bags and accessories.
Digest average estimates / 2003A / 2004A / 2005EConsumer Solutions Sales / $215.8MM / $222.1MM / $1123.5MM
Plastic consumables (approx. 24% of 4Q04 sales): The plastic consumables segment manufactures a variety of consumer and medical plastic products, including closures, contact lens packaging, plastic cutlery, refrigerator door liners, shotgun shell casings, surgical devices and syringes. The majority of its customers are in the health care and consumer product industries, including CIBA Vision, Johnson & Johnson, Scotts, Whirlpool and Winchester. Jarden manufactures plastic consumable products at six owned US facilities and one leased UK facility.
Digest average estimates / 2003A / 2004A / 2005EPlastic consumables Sales / $109.1MM / $128.1MM / $135.3MM
Zinc materials production (approx. 13% of 4Q04 sales): The Company also operates a materials-based group, which is the country’s largest producer of zinc strip and manufactures injection molded and industrial plastics. Jarden’s zinc division is the sole supplier to the U.S. Mint and Royal Canadian Mint of copper-plated zinc blank pennies. The other segment also manufactures industrial zinc products used in the plumbing, automotive and electrical industries.
Digest average estimates / 2003A / 2004A / 2005EZinc materials Sales / $42.8MM / $67.5MM / $65.2MM
For completeness, we include the table below which includes estimates relating to inter-company sales not included in the above segmental revenue forecasts.
Digest average estimates / 2003A / 2004A / 2005EInter-company sales / $38.2MM / $52.3MM / $50.7MM
Please see the separately saved spreadsheet file for more details
Total revenue for 4Q04 was $236.7MM, up 23.7% y/y ($191.4M in 4Q03) but down3.2% q/q ($244.6MM in 3Q04). 4Q04 revenue included U.S. Playing Card revenue while the year ago period did not, and comprised $123.1MM of revenue from sales of branded consumables ($75.9MM in 4Q03 and $152.3MM in 3Q04), $82.7MM of revenue from the consumer solutions business ($85.1MM in 4Q03 and $58.2MM in 3Q04), $28.5MM from sales of plastic consumables ($28.7MM in 4Q03 and $31.4MM in 3Q04), and $13.3M as other revenue or the zinc materials business ($13.1MM in 4Q03 and $15.5MM in 3Q04). We note the segmental revenue does not account for inter-company sales.
The quarter contained results of Lehigh (acquired in September 2003) and U.S. Playing Cards (acquired in June 2004). Sales for the quarter yet again were boosted by strong revenue from the Branded Consumables segment ($123.1MM). This segment reported a 62% sequential increase in sales and was primarily driven by sales of plating cards and related products (mainly poker kits) acquired in June 2004 in the U.S. Playing Card transaction. Operating profit in this segment improved 3.9 basis points to 13.2% primarily from a positive mix shift that was somewhat offset by increased raw material costs. The Consumer Solutions segment ($82.7MM) reported a 2.9% decrease y/y due to a decline in average selling price (ASP), which came as a result of JAH offering a new, smaller, lower price point FoodSaver model. The shift to lower ASPs is expected to continue through 1H05 and the company plans to launch the second generation FoodSaver at higher price points in the near term, benefiting 2H05 results. Operating margin for the segment declined 1.9basis points y/y to 21.4%. The company’s Plastic Consumables segment ($28.5MM) dipped a mere 60 bps y/y but recorded an operating loss of $600,000, compared to an operating profit of $3MM in 4Q03. Operating margin in this segment declined 12.2 points to (2.1%) in the quarter as the business was negatively impacted from increasing raw material costs, specifically polystyrene. In the Other (zinc) segment ($13.3MM), sales were up 1.5% y/y primarily due to the effects of purchasing rather than tolling zinc for certain customers. Also, strength in low denomination coinage sales complimented the y/y increase. One analyst (BAS) notes the AHI acquisition impact could boost numbers starting from 2005 and beyond. The analyst believes sales in 2005 will come from new product introductions, price increases, and increased distribution and cross selling. That said, the analyst believes positive results in 2005 could be offset from planned SKU reductions for products that do not meet minimum margin requirements and possible lower sales if retailers do not accept all price increases. However, the analyst believes JAH is not experiencing any unforeseen push back from retailers in response to planned price increases.
Margin
On February 17, 2005, JAH reported 4Q04 results. The company’s gross margin of 32.9% reflected a decline of 430 basis points compared to 4Q03’s 37.2%. Acquisitions and their related, lower margin products included in 4Q04’s results (as compared to 4Q03’s results), and higher commodity costs (resin, steel and zinc) resulted in the y/y gross margin contraction. Due to higher resin costs, JAH saw a $6MM negative price variance during the quarter. To note, JAH implemented 6% price increases for its plastic cutlery products effective September 1, 2004, and this is expected to ease off some of the pressure in 2005. Also, the OEM plastics business uses 30-day pass-through contracts. As such, analysts believe the company has built a fair amount of cushion in its model for higher costs in the coming year.
SG&A expenses for 4Q04 were $42.5MM compared to $39.6MM in 4Q03 and $41.7MM in 3Q04. As a percentage of revenue, SG&A declined 270 basis points y/y to 18.0%. The company incurred charges of $35.2MM that pertained to restricted stock charges ($32.4MM), plant closures ($1.9MM), and discretionary bonuses ($0.9MM). Operating income of $35.3MM improved 11.4% y/y (from $31.7MM). Operating margin declined 160 basis points y/y to 14.9%. Interest expenses were $8.4MM compared to $5.9MM in 4Q03 and $7.6MM in 3Q04.
At the close of 4Q04, Jarden’s cash balance stood at $20.7MM, compared to $125.4MMat 4Q03-end. Cash from operations increased61% y/y to $42MM. Full year operating cash flow declined 5% y/y to $70MM, mainly due to a working capital use of $34MM (a $30MM increase in use over the year ago period). Accounts receivable increased 37% to $127MM and Days Sales Outstanding (DSOs) increased 5 days to 49. Inventory increased 46% to $154MM due to acquisitions made in FY04, and on a days basis, increased 8 days to 87. Accounts payable increased 43% to $49MM. On December 31, 2004, the company’s long-term debt stood at $470.5MM, up 27% y/y, and debt to total capitalization was ~58.5%. Going forward, management expects the company to be a cash flow user in the first half of 2005 and a cash flow generator in the second. The following table lists down the relevant actuals for FY04:
2004A Data: / SG&A Expenses / Operating Income / Net IncomeDigest Average / $153.5MM / $128.5MM / $64.3MM
Current analysts’ estimates for FY05 peg total revenue in the range of $2604.2MM-$2667.0MM (CIBC, SunTrust). COGS and SG&A are expected to be $1888.5MM and $476.4MM for the year, respectively. Operating income is expected to be $246.0MM with an operating margin of 9.4% of revenue.
The following table lists the digest average estimates for FY04:
2005E Data: / SG&A Expenses / Operating Income / Net IncomeDigest Average / $476.4MM / $246.0MM / $113.3MM
Please see the separately saved spreadsheet file for more details
Earnings per Share
For 4Q04, JAH reported net income of $18.4MM and earnings of $0.63 per share, up 11.7% y/y ($0.57 per share on net income of $15.6MM in 4Q03) but down 19.5% sequentially ($0.79 per share on net income of $22.3MM in 3Q04). Results for the quarter excluded the pre-tax effect of a non-cash restricted stock charge of $32.4MM and the related tax benefit. Recall, after 3Q04 results, Jarden announced two changes in its executive compensation plans. First, the CEO and CFO received approval to accelerate the vesting of their restricted shares. These shares have already been granted and would normally vest over the next few years. They will pay the taxes on the shares upfront (roughly $10MM total), and Jarden took a $32.4MM charge in 4Q to recognize the accelerated vesting. This move enables the management to show a greater stake in the company. It also reduces the restricted stock drag on EPS in future years. Including this charge would result in a net loss of $3.4MM for 4Q04 leading to a loss per share of $0.12. This compares to net income of $2.3MM or $0.09 per share in 4Q03, which includes the pre-tax effect of a non-cash restricted stock charge of $21.8MM and the related tax benefit. EPS for 4Q04 was also impacted by $1.9MM incurred as plant shutdown charges and $0.9MM as discretionary bonuses. Consensus EPS estimate for the quarter was $0.63.
We note that the current results included contributions from Lehigh, acquired in September 2003, Loew-Cornell, acquired in April 2004 and USPC, acquired in June 2004. One analyst (Suntrust) does not view 4Q results as particularly meaningful. With the acquisition of American Household, Inc. (AHI), the company tripled its revenue base. As such, the analyst notes 4Q was the last quarter that consisted only of “old Jarden”. The analyst believes FoodSaver, which was the key to 4Q results and represented 20%-25% of 2004 sales, will represent less than 8% of total sales for the “new Jarden”. The analyst believes investors should place greater focus on the margin improvement story for “new Jarden,” as the analyst expects the company to expand the combined EBITDA margin from 11% to 15% over the next few years.
Current analysts’ estimates for FY05 show EPS in the range of $2.85-$2.95, with three of the four analysts sticking to the lower end of the range. The average estimate for 2005 works out to $2.88 that is expected to shoot up to $3.46 in FY06. The following table lists the various estimates for FY05 and FY06 from our digest group:
FY-2005 / FY-2006Low Estimate / $2.85 / $3.40
High Estimate / $2.95 / $3.50
Digest Average / $2.88 / $3.46
Please see the separately saved spreadsheet file for more details
Long-Term Growth
The company has grown aggressively through strategic acquisitions of complementary businesses and by expanding sales of our existing product lines. That said, long-term growth will rely on the company’s ability to leverage established customer relationships, through new product extensions, and cross-selling its branded consumables and consumer solutions products. Most analysts agree the AHI acquisition is a significant step towards optimizing retail distribution across multiple channels, and provides the company with additional earnings through brand out-licensing opportunities globally.
Management has stated a goal of EBITDA margin expansion to 15% over the next 3-5 years. Currently, analysts estimate LTG growth to be in the range of 12%-23% with an average estimate growth rate of 16.0%.
Target Price/Valuation
Target prices vary between a low of $50 (Banc of America) and a high of $60 (CJS Securities), pegging the average at $55.00. Analysts have primarily used the P/E multiple valuation method, but have also employed the DCF analysis for deriving their price targets. At the low end of the range, the analyst (BAS) derives a $50 price target, assuming that Jarden trades at parity to the target S&P500 multiple, or 17.0x CY05 EPS estimate of $2.95. At the high end of the range, the analyst (CJS Securities) recently raised his price target from $45 to $60 to reflect the recently closed AHI acquisition. The analyst’s target is predicted on an average 17x and 8.5x multiple of a 2006E EPS of $3.40 and EBITDA of $335MM, respectively.
At current levels, all analysts hold a positive outlook on the company’s prospects going forward, with all rating the stock a Buy.
Additional Conversation
Increasing competition. Average selling prices appear to be declining in the company’s core FoodSaver home vacuum packaging business due to rising competition. In response to the higher competitive activity, Jarden is increasing advertising and promotion and introducing new SKUs. Despite the activity, management indicated that it sees no real change in the dynamics of this category until 2H05 when its next generation product hits the market. The fact that competitor Applica lost its bid in a recent arbitration ruling to introduce new products and is still limited to selling only 1 SKU at one large retailer will also help JAH to further stabilize margins.
Management Outlook for 2005 and a year beyond. Jarden reiterated its consensus EPS estimate of $2.84 for FY05, up 26% as compared to 2004 normalized EPS of $2.26. Sales are expected to be up 1%-2% off of pro forma 2004 sales of $2.6B, driven by a number of new product introductions, a positive pricing impact and increased distribution (particularly on the international front), partly offset by the rationalization of lower margin business lines. Further, gross margins are expected in the 25%-30% range and exhibit improvement throughout the year.
Looking further out, management also expressed its comfort with the 2006 consensus EPS estimate of $3.43, implying 21% growth off of 2005. Finally, the company re-affirmed its goal of doubling current EPS within 3-5 years, with much of this from AHI synergies (management estimates $45MM-$111MM over three years) and additional tuck-in acquisitions, as well as organic growth.
Upcoming Events
Date / Event / Comments04/28/05 / 1Q05 Earnings Call / Anticipated
Individual Analyst Opinions
POSITIVE RATINGS
Banc of America – Buy ($50): BAS maintains a Buy rating for JAH’s shares, with a price target of $50. Acknowledging 4Q04 to be choppy, the analyst continues to remain positive on the company’s 2005 outlook, with his excitement centered on the possibilities for Sunbeam. The analyst looks forward to clarity to numbers from the AHI acquisition impact once JAH’s 8-K is filed, when the analyst expects to be more accurate in forecasting numbers for 2005. The $50 price target assumes Jarden should trade at parity to the target S&P500 multiple, or 17.0x CY05 EPS estimate of $2.95.(Report date: 2/18/2005)