Is Steinway (NYSE:LVB) attractive at this price?
I'm going to argue that it is, but I'd love to hear other people's opinions on this matter.
Steinway is actually two separate companies, stuck together in what amounts to a congeneric (i.e. no real synergies I can see) merger between the piano business and Conn-Selmer, a woodwind/brass instrument maker.
The CEO is an I-banker type who LBOed Steinway a few years back. Consequently, the company has a *big* slug of debt. Also, the CEO owns a separate class of shares which give him voting control over the company in spite of him owning <50% of the common.
The piano business and the premium brass/woodwind businesses have been doing so-so given the economic downturn. The company also sells & leases instruments to students in school bands. This part of the business has been terrible due to price competition. Mgmt is fixing this by outsourcing the school-band segment to manufacturers in China.
One other bad thing -- the company's labor unions recently went on strike.
The stock looks attractive for several reasons.
1. The company just resolved all its strikes and signed new contracts. According to the conference call, these contracts are going to lower costs significantly.
2. In spite of the economy, mgmt projects earnings of $0.80-$1.00 for 2003. In a decent economy, combined with fixing the band-instrument segment, I believe the company's earning power to be in the $2.00 range.
3. Steinway pianos are one of the best brand names in the world. The company's premium brass/woodwind brand names are similarly positioned. Steinway pianos are just beginning to penetrate China. I believe, at a minimum, these brands provide a margin of safety for how far sales could fall.
4. Mgmt is paying down debt as rapidly as possible using retained earnings. Assuming the company continues to meet its debt obligations, this will increase EPS over time by decreasing debt (the class LBO/equity stub situation). Interest coverage has generally been in the 3x to 4x range.
5. The CEO has a large equity position in the company and relatively few options. This tells me that he's in it for the long haul, and that he's working with us as shareholders not against us. I've also been generally impressed with his candor and demeanor on the conference calls.
6. Book value is about $15.28 per fully diluted share. Sales are $37 per fully diluted share. These numbers don't necessarily guarantee you anything, but they help establish a price floor and a margin of safety.
The stock recently traded around $13.80. Any thoughts?
(Note: I do currently own shares in the company) |
