Courtney Hale
It’s been a very long time since I last covered a stock HP Fuller (New York Stock Exchange: Complete). In fact, my last review of the business dates back to 2017. This simple fact and some recent M&A action warrant an update.
At the time, the adhesives company announced a deal worth more than $100 million to acquire adhesives company Wisdom Worldwide. The prevailing stock price around the $50 mark suggests the company is trading at 18 to 19 times adjusted earnings, with earnings power seen between $2.60 and $2.70 per share. With leverage ratios reported at 2.5 times EBITDA, valuations looked quite plump.
The company has set ambitious targets for 2020, calling for EPS to approach $4 per share (on an adjusted basis) on the back of a combination of sales growth and margin expansion. If the company can achieve that, I see no reason why shares can’t rise to the $70-$80 level At this point in time.
Fast forward to today, shares are trading exactly in that range, but that is of course two years into 2020. The reality is that the company is seeing modest sales growth and posting strong profit margins, but frankly it’s a fairly boring and decent name, and thus a fair valuation. .
Although the shares are not expensive, they are not cheap either, given some of the leverage used, which makes me conclude a neutral position.
Complete now
HB Fuller has been in the business for over 130 years, supplying adhesives on a global scale. The company focuses on perfecting adhesives, sealants and other specialty chemical products used to improve products and lives.
If we look at the results, we find that the company has far exceeded its 2020 ambitions, at least in terms of sales. In fact, 2023 sales fell 6% to $3.51 billion, due to customer inventory reduction trends, with volumes down more than 8% amid a modest positive pricing impact.
About 45% of these sales are generated from sanitary and hygiene adhesives and consumer adhesives, with engineering adhesives accounting for 40% of sales. All this is complemented by a smaller business in the field of building adhesives.
Despite weak momentum on the top line, the company’s margins grew significantly, driven by a combination of pricing, inflationary pressures and cost control efforts. All of this means EBITDA margins rose 240 basis points to 16.5% of sales, with EBITDA reaching $580 million.
The company reported GAAP earnings of $145 million, or $2.59 per share, based on 56 million shares. Earnings were down largely due to various adjustments, related to project costs, restructuring charges and the like, with adjusted earnings down just thirteen cents to $3.87 per share.
Net debt was reported at $1.66 billion, with leverage still quite tight at 2.9 EBITDA, even though the company has delivered on its promises since 2017, generating earnings of close to $4 per share. However, this promise was scheduled to be fulfilled in 2020, but now we are already in 2024.
The company provided strong guidance through 2024. Full-year sales rose 2-6% with adjusted EBITDA improving to $610-$640 million. All of this should result in adjusted earnings of $4.30 per share, plus or minus fifteen cents. With stocks trading in the mid-70s in the spring, an adjusted earnings multiple of 17-18 times seemed fairly fair.
Getting lost during the spring
In March, HB Fuller reported relatively strong first-quarter results, with sales up just 0.2% to $810 million. The minimal growth was entirely due to the impact of acquisitions, with organic growth being negative in the mid-single digits. Adjusted earnings improved twelve cents to $0.67 per share, as the company reiterated its full-year forecast.
Net debt was very stable at $1.67 billion, but as EBITDA improved to $594 million, leverage ratios dropped to 2.8x. With about 56 million shares outstanding, the stock’s $4.2 billion valuation values the entire company at about $5.9 billion if we include net debt. This values the company at about 1.6 times sales and about 10 times EBITDA.
In April, the company announced an 8% increase to its quarterly dividend, which is now paid at an annualized run rate of $0.89 per share. In May, HB Fuller announced the acquisition of ND Industries, a provider of specialty adhesives and fastener solutions.
The purchase of the Detroit-based company will add about 5 locations, 300 workers and $70 million in annual revenue to HB Fuller, adding about 2% to initial sales. Although the purchase price has not been announced, the deal is likely to be worth around $100 million based on its own valuation, making a minor dent in leverage ratios and the company’s performance.
And now?
The truth is that HB Fuller has largely delivered on its promises showing modest growth and modest marginal gains, although leverage always seems high for my taste, with leverage ratios typically hovering around 3x.
However, the current 17-18 times earnings multiple seems quite reasonable, as the latest move will create a small driver for the business here, all while the EBITDA improvements expected this year should allow leverage ratios to remain under Strong control.
Given that shares have been trading in the $60-$85 range since 2020 already, valuations have compressed a bit over time, with current valuations frankly looking pretty fair, maybe a little cheap, but nothing too cheap to get excited about. Immediately.
For the stock to see real traction, organic growth must improve, as mergers and acquisitions are pursued in order to offset declining organic sales numbers, which are attributed to inventory shrinking trends.
Given all this, I consider the shares to be trading pretty much at fair value here, as I’d be happy to buy this stock in the low 60s, but for now, I see fair value at best, with better opportunities to deploy capital elsewhere . At mid-60s levels, at a multiple of 15 times earnings (or an earnings yield in the top 6) I see a sufficient margin of safety for Fuller to trade with compelling risk and reward going forward.
