Monday, September 21, 1998
Salton/Maxim Housewares Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SALT)") else Response.Write("(Nasdaq: SALT)") end if %>
Phone: 847-803-4600
Website: http://www.salton-maxim.com
Price (9/18/98): $14 15/32
HOW DID IT DOUBLE?
Investors who salted away shares of Salton/Maxim, a marketer of kitchen and home appliances and tabletop products, have enjoyed a six-bagger over the last 20 months. The shares have packed a wallop, thanks to former heavyweight champ George Foreman, a major new contract with retailing heavyweight Kmart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KM)") else Response.Write("(NYSE: KM)") end if %>, and some recent moves to beef up the bottom line while growing sales.
Sales for FY98 (which ended June 27) soared 67% to $306 million, more than tripling earnings per share to $1.12 versus $0.34 for FY97. Gross margins ballooned to 37.3% from 29.2% thanks to a better product mix.
While sales of the Breadman breadmaker have flattened out, Salton has enjoyed booming sales of its Juiceman juicemaker, George Foreman Grills, and Farberware products. It has also gotten a huge lift from a January 1997 deal to offer kitchen appliances, personal care products, heaters, fans, and other items to Kmart under the White-Westinghouse brand. Kmart accounted for 17% of Salton's sales during the first nine months of FY98.
Meanwhile, Salton announced May 7 that it was essentially reversing a 1996 deal with Windmere-Durable Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WND)") else Response.Write("(NYSE: WND)") end if %>. It has now repurchased Windmere's 50% stake in Salton (and ended other complex financial arrangements) by using a new $215 million credit facility from Lehman Brothers and $40 million received from issuing preferred stock to Centre Partners Management. The preferred stock converts at $17 a share into 2.35 million Salton shares.
These accretive moves leave Salton independent and prepared to juice up business with an acquisition. On August 27, the firm said it would acquire consumer appliance and timepiece manufacturer Toastmaster <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TM)") else Response.Write("(NYSE: TM)") end if %> for $7 a share, or $53 million, plus the assumption of $48 million in debt. Since Toastmaster has $155 million in trailing 12-month sales, this deal, expected to be completed by year-end, will significantly boost Salton's sales.
BUSINESS DESCRIPTION
Salton/Maxim Housewares designs and markets kitchen and home appliances (85.3% of FY97 sales), glassware and other tabletop products (9.2% of sales), and personal care appliances (5.5% of sales). Its brands include Breadman, Juiceman, White-Westinghouse, Farberware, Wet Tunes, George Foreman, and Block and Atlantis Crystal.
The company operates a manufacturing facility in New Jersey, but most of its products are made by contractors in Asia. It sells to department stores, gourmet and lifestyle merchants, and mass merchandisers. It also uses 30-minute infomercials to sell the Juiceman and George Foreman Grills. Its top five customers accounted for 47% of sales in FY97.
Competitors in the kitchen and home appliances space include Hamilton Beach Krups, Black and Decker <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDK)") else Response.Write("(NYSE: BDK)") end if %>, and the troubled Sunbeam <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SOC)") else Response.Write("(NYSE: SOC)") end if %>. Insiders own 1.5 million shares, or 11% as of the last proxy, with most held by CEO Leonhard Dreimann.
FINANCIAL FACTS
Income Statement*
12-month sales: $305.6 million
12-month income: $15.1 million
12-month EPS: $1.12
Profit Margin: 4.9%
Market Cap: $197.1 million
(*As of June 27. Excludes one-time items.)
Balance Sheet*
Cash: $0.7 million
Current Assets: $127.9 million
Current Liabilities: $83.2 million
Long-Term Debt: None
(*Prior to financial restructurings; doesn't include Toastmaster.)
Ratios
Price-to-earnings: 12.9
Price-to-sales: 0.64
HOW COULD YOU HAVE FOUND THIS DOUBLE?
The Kmart deal helped sales nearly double in FY97 to $183 million from $99 million, while higher gross margins pushed operating profits up 106%. That trend continued into the September quarter when sales rose 89% but EPS jumped 244%. Rising margins are the hallmark of many Doubles. Moreover, Asia's financial crisis suggested gross margins would continue improving.
There were some reasons for caution, though. First, sales, general and administrative (SG&A) expenses ran wild in the 2Q 1998, hitting 24% of revenues versus 18.3% last year due to infomercial expenses. Second, a couple of small customers who owed Salton $2.4 million filed for bankruptcy during the March quarter.
Also, long-time Salton investor Finaco Investors Fund L.P. liquidated its entire 1.06 million share position at prices ranging from $10.50 to $10.88 in April. Meanwhile, Sunbeam's increasing troubles, including its huge inventory of grills, created opportunity but also some uncertainty.
WHERE TO FROM HERE?
The lone analyst estimate offered by Zacks looks awfully stale. In any case, the Toastmaster addition will have a significant impact on Salton. For one thing, it will add a lot of debt. It also presents major challenges.
A quick look at Toastmaster shows a company with just 18.7% gross margins in FY97 and 1.2% net margins. Sales have been flat. With 78% of revenue from kitchen countertop appliances and 21% from clocks, Toastmaster's lines overlap a bit with Salton's current products but are also "very complementary" according to Salton CEO Dreimann. Salton hopes to increase the combined company's distribution into new retailers while improving Toastmaster's product sourcing and squeezing out economies of scale.
Investors need to work up some pro forma numbers to account for this combination. For now, though, they can definitely cheer Salton's recent financing moves. Buying back the Windmere shares means that shares outstanding have been reduced to 9.1 million from 13.5 million. Assuming this transaction had occurred at the beginning of FY98, net earnings would have been $1.75 per share for the year. That means the stock now trades at just 8.1 times pro forma earnings!
There are a few reasons for caution, though. The August to November period is Salton's strongest season, and it recently launched its new George Foreman Fusion Grills. That may partially explain why inventories are up 82% over last year despite just a 67% year-over-year sales jump. But the inventories are worth watching.
Also, Westinghouse Electric has challenged Salton's right to use the Westinghouse trademark. The trial is set to start soon. A ruling against Salton could have a major effect given that it would jeopardize the booming business with Kmart.
Even with these caveats though, Salton seems like a story worth investigating.
-- Louis Corrigan
([email protected])