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<DAILY TROUBLE>
Tuesday, February 23, 1999
Burlington Industries Inc.
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Phone: 336-379-2000
Website: http://www.burlington-ind.com
Price (2/22/99): $6 5/16
HOW DID IT FIND TROUBLE?
This time last year, Burlington Industries' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BUR)") else Response.Write("(NYSE: BUR)") end if %> share price was in the mid-teens and momentum was on the textile maker's side. The company had strung together a series of quarters in which profits were higher than the year before, and some traders thought that Burlington was going to break from its sleepy ways.
Shareholders in Burlington were rattled awake all right, but it was because their stomachs were in their throats from the free-falling value of their shares. The company does most of its production in the U.S., and the strong dollar has made competing with relatively cheap imports from Asia and elsewhere rather difficult. Sales into the apparel industry started to decline, and that initiated a sell-off in the stock. Such is life in a commodity business, where companies are price takers, not price makers.
Burlington really fell after its late-January announcement that there would be a major restructuring, including a rather large reduction in its domestic workforce. While done to cut costs, it highlighted the difficult environment the company is working in. Wall Street also didn't like the quarterly earnings per share of $0.14, well below last year's reported profits of $0.22 per share. The result is a stock that has quickly gone out of style.
BUSINESS DESCRIPTION
Based in Greensboro, North Carolina, Burlington Industries is the third-largest textile producer in the nation. On a sales basis, only Springs Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMI)") else Response.Write("(NYSE: SMI)") end if %> and private company Milliken are larger. About 60% of Burlington's sales are to the apparel industry. The company sells a variety of fabrics including woven wool, denim, and a vast array of specialized and synthetic blends. The balance of the company's products is sold to the home furnishings market for products such as bedding, draperies, and carpeting.
Most of Burlington's operations are in the U.S., but its domestic operations are in the process of being sheared. In a move designed to cut costs, last month the company announced plans to cut 2,900 jobs and close seven plants in the States, trimming its domestic output about 25%.
On the other hand, Burlington is investing heavily in its operations in Mexico. A number of factors, including NAFTA, have made Mexico the largest source of U.S. garment imports, and two new plants opening later this year in Mexico are aimed at supplying the growing garment industry south of the border.
FINANCIAL FACTS
Income Statement
12-month sales: $1935.9 million
12-month income: $75.2 million
12-month EPS: $1.24
Profit Margin: 3.9%
Market Cap: $365.4 million
Enterprise Value: $1190.9 million
Balance Sheet
Cash: $19.7 million
Current Assets: $638.7 million
Current Liabilities: $198.4 million
Long-term Debt: $845.2 million
Ratios
Price-to-earnings: 5.1
Price-to-sales: 0.19
EV-to-sales: 0.62
HOW COULD YOU HAVE SEEN IT COMING?
The first indication that the company's health might be starting to fail was the March 1998 earnings announcement in which sales were down slightly (less than 1%) from the year before. Declining sales are rarely a sign of fundamental strength in a company's business, and this proved to be the tip of the proverbial iceberg. By the time the June earnings announcement came along, comparable sales were down more than 5%. It took awhile for these sales declines to hit the bottom line, but in the most recent quarter, profits finally showed a negative comparison, too.
More importantly, one could have looked at the basics of Burlington's operations and seen that it is quite an unattractive business. The textile industry is a commodity business where pricing power is minimal and margins are, consequentially, quite low. Net margins are rarely above 4% in the industry -- a number that leaves little wiggle room when economic problems appear.
Another attribute that should have had investors thinking twice is the capital required to keep the business running. With more than $600 million worth of current assets that are not cash -- namely receivables and inventory -- the company is about as far from being a financial Rule Maker as possible.
Those using Economic Value Added (EVA) valuation metrics, such as those used widely in the Boring Portfolio, would have also steered clear of Burlington. With the company's return on assets (ROA) and return on invested capital (ROIC) running in the low single digits, far below Burlington's cost of capital, it should have been apparent that the company was going to have a very difficult time adding shareholder value.
WHERE TO FROM HERE?
The company's directors obviously think that the stock is undervalued, since they have initiated a share buyback worth some $25 million, or roughly 5% of the shares outstanding. Management once took the firm private through a leveraged buyout (LBO) in the 1980s (only to bring it public again in 1992), and that happening again is always a distinct possibility.
When a company has excess cash, share buybacks are an excellent way to increase shareholder value. Burlington, however, does not have excess cash and has a significant chunk of debt. The share buyback should, therefore, be seen as a simple leveraging move and not much more. Leverage can increase returns when things go well, but can truly exacerbate damage when things go poorly.
At less than 6 times trailing profits, Burlington can certainly be called cheap. But is it inexpensive or undervalued? Those are completely different stories. Old industrial firms like Burlington simply will never deserve the types of premiums that many new-age technology firms command. Working in a commodity business, Burlington just does not have the pricing power to grow profits at anything but a meager rate. Furthermore, the company requires scads of cash to keep its plants operating and employees paid, and the textile business is not one that lends itself to fiscal efficiency. Adding shareholder value will always be an uphill battle for any company in the textile industry.
Money can be made by purchasing unloved stocks when Wall Street discounts the shares too heavily. It looks like the discount given to Burlington may be too large at these levels, but a bounce, if it comes, will likely be minimal. Either way, Burlington shareholders will unlikely ever see the types of long-term compound returns that make investing in the stock market truly rewarding.
-- Paul Larson
([email protected])
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