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
8 comments:
Don't you think, though, that 8x to 10x is a bit rich for a company with no growth? How does it look on a free cash flow multiple?
Thanks for the comment. The multiple also takes into account the stability of the Cash flow stream. The firm does have GDP type growth and has not fully explored opportunities in Asia.
Having said that, I am comfortable valuing a no growth business at 10x FCF. My thinking is - the company could operate as it is and a private owner could get extract cash to yield 10% every year. Wouldn't you agree? Btw, the company has $20-25 million in FCF during normal years.
I don't disagree, and I like your real estate story. It just doesn't look conspicuously cheap to me. I mean, just at random from my watchlist, a company like Computer Sciences (CSC), which also has very stable cash flow historically, is trading at less than 4x (EV/EBITDA). I have to admit also (a) I don't think Steinway has made a decent piano since 1928 and (b) I'm prejudiced against the management, though I know they're very bright guys who certainly understand cash flow.
I like your blog, though -- thoroughly rational!
bsivia, thanks for your post.
I really like it.
In general, I fully agree with you. Just a couple of minor things:
1. You mentioned the 57th street building is worth at least 100M. But the land is owned by others. From its annual report, the land lease fee resets every 20 years. Also, it paid 30M for this building 10 years ago, are you saying after 10 years, the value more than tripled?
2. What I like this company: stable cash flow, good band and industry leader on high end piano, no liquidity issue in short term, and of course the asset value.
3. What I don't like this company: debt is still relatively high, sales are soft and down (but the positive cash flow so far is impressive).
Overall, I think it is a good buy.
bsivia,
I just stumbled across your blog a few days ago. It's refreshing to see such rational and logical analysis grounded in value.
I read the works Graham and Dodd, Buffet's letters, and Munger's Almanac and became hooked on the value investing philosophy.
Like you, I'm trying to find a mentor and work with a value fund, but it's tough right now. I hope the search is going well for you.
In the meantime, I'm spending most of my time dissecting and analyzing companies using all the different metrics (from BG's net nets to free cash flow). They've all been very eye-opening and the works of past and current value investors have helped me piece together a better understanding what value is.
I appreciate you sharing your insights. If you ever need a sounding board, feel free to message me.
Neil
Kent: Thank you for the comment. (a) I have no means of appraising the Real Estate these companies own. But if you go to their website and look up the 8-K released on 02/10/06, you will see property appraisals. I did assume, however, that the value is at the same level as February 2006.
(b) You are right, the debt level is high and it can be uncomforting, especially in this environment. Real Assets do provide a safety net, but as we saw, when push comes to shove, a good balance sheet goes a long way.
Neil: Thank you Neil. It's very easy to get hooked isn't it! I mean, the things that they say just make so much sense. Its great that you are analyzing companies - that's where the the rubber hits the road. Feel free to comment on any of my posts. I will take you up on the offer sometime (and you may email me at bsivia@gmail.com if you wish).
Thanks, bsivia.
Actually, after I did more research on this company, my opinion changed.
From the beginning, I am satisfied with almost everything in this company, except the fact that there is no proof that the management is good.
Now, I have seen that the chairman Kyle sold majority of his common stocks in March around $10.50.
I also saw the earlier SEC violation from him in 1990s, when he overestimated his fund asset.
An incompetent management combined with great value may be acceptable, but a bad management is not acceptable to me in any case.
As a chairman, and with about 50% of class A stock, he sold most of his common stocks direclty in open market. The CEO also indirectly sold a lot of stocks at the same time. But that may be some triky deal started back in 2007. I am not sure how the deal was structured. But I suspect there is some triky stuff going on there.
If these two "owner" of the company has no confidence in long term, and willing to bash their own stocks with a selfish "diversification", why would other shareholders love this company?
Since these two guys hold 100% of the class A common stock, which has 98 times of voting power than regular common stock, it is impossible that other major stockholders could overthrown them.
It is something to avoid for me now.
How do you get the 200M value for the Queens property. How many square feet is it? Zoning? Condition? Comps?
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