What’s up with Hillenbrand
As a saver I keep what investments I have in separate buckets. I have a bucket for my 401k, I have a bucket that generates current income, and I have a bucket where I hold stocks with the philosophy that these stocks “will be worth more in ten years than they are worth today”. The idea of that last bucket is stocks that have been bought to hold and grow and no tax (except for dividends) is required on them until they are sold. And, I don’t envision doing that for some time.
In that group I have stocks like Berkshire, Disney, Pepsico, Johnson & Johnson, Medtronic, Visa, Mastercard, Hormel, Boeing and the like. I also have companies that my 20-something children have told me that their generation uses a lot — like Netflix, Spotify, and Shake Shack. Finally, probably because of my life work as a funeral director I have – what have always been staples of that industry – stocks Service Corporation International and Hillenbrand Industries, the parent company of Batesville Casket Company.
While I have had pretty good luck with this group of stocks over the years, it always seems that at any given time, one or more of these companies can be a sub-par performer. And this year one of those companies is Hillenbrand Industries. They are set to finish up their Fiscal 2019 year in about a week at the end of September and it remains to be seen if they will pass last year’s $1.77 billion in revenue and $170 million in operating income. For the 2019 fiscal year, the stock hit a high of $53.41 per share on October 3, 2018, and was trading at $30.49 per share as I write this on Monday, September 23 — that’s a drop of over 40%.
Now, there is no doubt that Hillenbrand is a different company from when I first learned about it and started following it as a funeral director’s kid who knew of Batesville Casket Company. Back in that day, Hillenbrand was also known as the owner of Hill-Rom hospital bedding and the parent company of American Tourister luggage. And, I can remember in the 1980’s when they broke into the financial services sector with their Forethought Insurance product for pre-need.
One thing remains constant in business. . . and that is that business is always changing and evolving. With the exception of their core Batesville line, I believe that all the other Hillenbrand companies from the previous paragraph have been spun off by now with Hillenbrand moving into and concentrating on companies in what they call their “Processed Equipment Group (PEG)”. It has been quite a remarkable transformation for Hillenbrand to move their company in this direction, where the PEG now accounts for roughly 70% of their revenue.
Batesville Casket Company now accounts for only about 30% of Hillenbrand revenues, but the company relies on the cash and profits it generates to help with their move into the PEG. In their last guidance report, Hillenbrand maintained that the PEG is expected to show revenue growth of 3-5% annually while Batesville Casket Company will show revenue loss annually of 1-3% based on the demand for caskets which will be driven by long-term predictable demographics and consumer trends.
Hillenbrand issued an investor presentation last week that is very interesting. You can see that presentation here. One of the things that I noticed is that they state that they will be able to use their strong cash-flow position, partly created by Batesville, to rapidly pay down debt of PEG acquisitions.
Another piece of the presentation to me was a pie chart that indicated of the $3 billion “Death Care products industry in the U.S. and Canada”, that less than half comes from caskets -49%, with the remainder coming from Markers (20%), Vaults (19%), and Cremation Products (12%). That pie chart really indicated to me that the consumer public is spending so much less on the products associated with cremation (12%) than on the products associated with earth burial (at least a casket and vault – 68%).
That statistic has led me to believe that the urn and cremation products market, which is highly fragmented – is not a high dollar total market. That would also lead me to believe that the cremation product market will rapidly consolidate to get to a better economies of scale for the largest players.
Hillenbrand stock is down this fiscal year. And, they have been transforming the company into something that one could hardly call a death care company any more. Time will tell if this transformation will be as beneficial as management and stockholders hope. One thing that you can say about Hillenbrand is that they were decisive and not content to just sit back when their cash machine, Batesville Casket Company, ran into societal changes causing long term negative demographic trends for the base product.