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Tuesday, May 19, 1998
Sunbeam Corp.
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Phone: 561-243-2100
Website: http://www.sunbeam.com
Price (5/18/98): $24 5/8
HOW DID IT FIND TROUBLE?
Consumer products company Sunbeam has seen sunnier days. Bid up from $13 in mid-1996 on turnaround expert Al Dunlap's promises of debt-free profitability, the shares took another ride up to $53 in early March on $2.5 billion in acquisitions and Dunlap's agreement to stick around for another three years.
Yet a profit warning a week later followed by an actual first quarter loss has undermined the Street's confidence in Dunlap. The stock has now been mushed in the Oster blender and scorched on the Grillmaster grill.
"Chainsaw Al's" makeover of the sleepy Sunbeam seemed on track not long ago. FY97 revenues were up 19%, with the company delivering 17% operating margins and 10.5% net margins. Acquisitions of recreational products firm Coleman <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CLN)") else Response.Write("(NYSE: CLN)") end if %>, consumer products maker Signature Brands <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIGB)") else Response.Write("(Nasdaq: SIGB)") end if %>, and safety products concern First Alert <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALRT)") else Response.Write("(Nasdaq: ALRT)") end if %> gave Dunlap more restructuring fodder. These deals were also expected to be accretive in FY98. Sunbeam seemed prepared to become an industry consolidator.
On March 19, clouds moved in on word that major retail customers were changing order patterns and tightening inventory management to cut warehouse expenses. First quarter sales would fall below the $285 million estimate but still come in above year-ago levels.
The news got worse April 3 when the shares dropped another 20% to $36 on the way to $25 after Sunbeam said it would actually report a first quarter loss (versus estimates of a $0.30 per share profit) due to a year-over-year drop in sales and higher-than-expected costs related to the acquisitions.
Actual first quarter sales fell 9%, leading to an operating loss even after excluding special charges. In particular, sales of outdoor grills sank well below expectations due to El Nino and a recall caused when one retailer assembled the grills incorrectly. Delays in shipping its water filtering product also cost Sunbeam about $20 million in revenues.
In a conference call on May 11, Dunlap said that senior management was distracted by the acquisitions. In addition, the pre-announcement, he said, actually contributed to the troubles as retailers bargained for heavy discounts and the marketing guy left in charge signed off on unprofitable contracts to move merchandise. That guy has now been canned, but the rough ride has left disgruntled analysts wondering how much of Dunlap's bluster is mere hype.
BUSINESS DESCRIPTION
Sunbeam is a leading marketer of durable household consumer products such as blenders, electric blankets, coffee makers, gas and charcoal grills, and health-related products such as water filters and air cleaners. Its major brands now include Sunbeam, Oster, Coleman, Mr. Coffee, First Alert, and Grillmaster.
The acquisitions add about $1.6 billion in FY97 revenues, though the company plans to divest three Coleman businesses (including backpack division East Pak) that don't fit strategically. Sunbeam expects to get $250 to $350 million for these units. The expected integration will lead to $280 million in one-time pre-tax charges, including $150 million in cash costs, but should produce $250 million in annual savings by mid-1999.
The company plans to close two Sunbeam facilities in Mexico, outsourcing this manufacturing. It also plans to combine the 10 offices of the joined companies into a new Boca Raton headquarters set to open in the fall. It will also consolidate 23 factories into 15 with more focused production. Also, 47 warehouses will be consolidated to 14, and 35 sales offices will be reduced to 15.
Expanding its information technology system should improve efficiency and profitability, especially given that Coleman's system was a mess.
Prior to the acquisitions (which involved stock, cash, and debt assumption), insiders held 6.4% of the shares, with most owned by Chair/CEO Dunlap.
FINANCIAL FACTS
Income Statement*
12-month sales: $1159 million
12-month income: $77.2 million
12-month EPS: $0.72
Profit Margin: 6.7%
Market Cap: $2130.1 million
(*Prior to acquisitions and based on continuing operations.)
Balance Sheet
Cash: $193.5 million
Current Assets: $1438.6 million
Current Liabilities: $446.7 million
Long-term Debt: $1637.8 million
Ratios
Price-to-earnings: 34.2
Price-to-sales: 1.8
HOW COULD YOU HAVE SEEN IT COMING?
Given that a crew of nine Wall Street analysts were blindsided by the recent troubles, it's hard to argue that an individual investor could have seen this coming. But small investors must always be skeptical of the analysts, especially when they're so clearly enamored of a CEO. After the first profit warning, investors should have been alerted. Even before that, though, one might have wondered about the El Nino effect on grill sales.
WHERE TO FROM HERE?
Dunlap recently said that Sunbeam intends to become the global leader in the durable consumer products industry. The new brands will help. Also, Coleman's strong distribution system in Europe and Asia should complement Sunbeam's system in Latin America, leading to terrific synergies just from exploiting cross-selling opportunities.
Moreover, with $1 billion in sales coming from its top six customers (the likes of Home Depot and Wal-Mart), a new sales structure organized by retail channel should solidify Sunbeam's relationships with key resellers. Also, more focused marketing, with more spent on brand-building and less on co-opt discounts to retailers should help keep margins meaty.
Add in the cost savings from restructuring and increased revenues from the rollout of new products, and the company is now endorsing $1 per share in earnings (excluding one-time charges) for FY98 and $2 a share for next year (down from estimates of $2.88 just a month ago). From that FY99 base, Sunbeam hopes to deliver 10% to 12% top-line growth, 15% to 18% operating margins, and 15% to 20% EPS growth.
Yet during the conference call, several analysts seemed skeptical or downright grumpy. With 20% operating margins projected for Sunbeam even before the new acquisitions, one asked whether these deals will really be accretive given the company's projected outlook. Another expressed concern over Sunbeam's sale of receivables and its "bill-and-hold" plan that some saw as a devious fourth quarter revenue-booster since it amounts to recognizing sales before products are actually shipped. This second analyst felt that Dunlap had buried these important issues in the 10-K.
Management deflected these concerns with relatively plausible rebuttals. Still, Dunlap got into a shouting match with one analyst who offered caustic comments regarding the recent wholesale restructuring of Sunbeam's management team in light of Dunlap's stated view that good management is the key to a successful business: "What happened to the last great management team?"
Taking the FY99 earnings estimate and multiplying by the expected long-term growth gives us an 18-month price target of $30 to $40 a share. However, Wall Street now seems likely to take a "show-me-the-money" stance. So even assuming that Chainsaw Al can deliver, investors should probably wait this one out until the disappointment of recent events completely sinks in. Sunbeam will likely see sunnier days ahead, but the short-term forecast still looks partly cloudy.
-- Louis Corrigan
([email protected])
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