Steinway Musical Instruments (LVB: $12/share) is a renowned manufacturer of pianos and band instruments. The piano segment (60% revenues) operates under the brand names Steinway, Boston, and Essex. The premium Steinway brand has an 85% market share and represents roughly 80% of the revenue in this segment. The band and orchestral segments (40% revenues) operating under Conn-Selmer divisions sell a wide array of other musical instruments and accessories. Steinway is not a growth story. It is however, a distinguished brand which has delivered consistent cash flows and has the added margin of safety in hidden real estate assets - it owns the 57th Street building in Manhattan and a waterfront manufacturing facility in Queens.
Bird in the Hand: The margin of safety in this investment comes from the hidden read estate value and the working capital surplus. As per a press release by the management in Feb, 2006, West 57th street building was purchased in 1999 for $30 million, is carried on the books at $24 million and has a market value of at least $100 million. In addition, the Steinway manufacturing facility in Queens is on the waterfront, has views of Manhattan and is carried on the books for $3 million but is worth around $200 million. Furthermore, the company has $172 million in inventory and there is precedence that it will not be liquidated but sold piece meal. There are other assets on the company’s books that have substantial worth. I would roughly peg the total value of the hidden assets at $200 million or $23/share after tax. The company does not need to own the aforementioned real estate to operate and hence the assets can be monetized without substantial effect on the operations (add: lease expense for factory, subtract: rental income from building).
Bird in the Bush: The company has an enterprise value (EV) of $285 million (including pension underfunding) with a market capitalization of $100 million. Steinway’s revenues have been flat averaging $375-$400 million for many years. The company has consistently had gross margins in the 28-30% range and operating margins normalize at 8.5%. Due to the consistency in operating metrics we can normalize cash flows and determine the valuation. The company on a normalized basis does around $45 million in EBITDA and approximately $20 million in FCFE. At 8x EV/EBITDA the company would be valued at $360 million. Looking at the FCF multiples, at 10x FCFE the equity of Steinway would be worth around $200 million. The stock has a 60-100% upside to $16-20/share just based on the operations. The earnings are depressed right now because of the macroeconomic conditions, I reckon, however that (a) there are so secular forces against the company, and (b) the company has not suffered permanent damage from imports or consumer demand.
In addition, there might be some growth opportunities in countries like China where Steinway is working to establish a presence. Chairman Kyle Kirkland and CEO Dana Messina have majority voting control due to their 100% ownership of class A stock, and therefore have full control of the major strategic decisions faced by the Company. They have made prudent decisions so far and have been fairly compensated, but this does pose a substantial risk. In conclusion, the company seems to be worth around $35-$45/share. This is a classic ‘buy on assets, sell on earnings’ play.
Disclosure: None
