Why is ‘Mini’ Berkshire Hathaway Selling Out of This Manufacturing Company?

Mueller Industries, Inc. (NYSE:MLI) in an amended 13G filing earlier this week announced plans to repurchase all 10,422,859 of the shares owned by Leucadia National Corp. (NYSE:LUK) for $41.00. The aggregate price comes in at $427,337,219 and represents Leucadia’s entire stake in Mueller. Muller traded around $48 prior to the announcement, but is down by 6% this week on the news.

Leucadia, known as the “mini Berkshire Hathaway”, is a holding company that has operated much like an investment fund since Ian Cumming and Joseph Steinberg took over the company in 1979. Ian Cumming and Joseph Steinberg, as Warren Buffett is to Berkshire Hathaway, are the faces and driving force behind Leucadia. Cumming and Steinberg both currently own about 13% of Leucadia. 

Warren Buffett portrait

Founded over 150 years ago, the company considers its specialty in deep value investment opportunities—buying companies substantially out of favor and below intrinsic value. The company has stakes in such industries as mining & drilling, telecommunications and manufacturing.

Leucadia has publicly stated that it will sell parts of its operations and ownership stakes when prices reflect an advantageous level; we believe this is what has happened with Mueller. Mueller is up 22.5% since the end of 1Q 2011 when Leucadia first took a stake, versus the S&P 500 up only 8%.

Although Leucadia may be getting out of Murrell, both Chuck Royce and Ken Fisher are still in the stock, each owning around 1 million shares—check out all funds owning Murrell. Also, prior to the Leucadia announcement, other insiders were selling around $44.50. The company currently trades around $45.30.

The company has been on a solid uptrend operationally—for 2Q, Mueller reported earnings that put sales at $594 million, compared to $653 million a year ago, operating income was $29 million against $36 million a year ago and income was $18 million or $0.47 EPS, against $22 million or $0.59 diluted per share a year ago—all very positive trends. Although most of the quantitative facts have been positive for the company, its $0.47 2Q EPS did fall short of recent EPS estimates of $0.74.

A few of the other key manufacturing companies include Ingersoll-Rand PLC (NYSE:IR), Blount International, Inc. (NYSE:BLT) and Actuant Corporation (NYSE:ATU).

As seen with strong EPS trends for Murrell, manufacturing has seen modest increases over the past few quarters, with July PMI—Purchasing Managers Index—climbing to 55% from 47%, on the back of strong growth in new orders. Additionally, the total manufacturing capacity utilization came in at 78%, a slight increase but still well above the all-time low of 67.3% in June 2009. Ingersoll has managed to consolidate its manufacturing facility operations and should only see a 5% decline in 2012 revenues. As the company refocuses on manufacturing, its restructuring process includes the sale of its stake in Hussmann, the retail-store refrigeration business. EPS is expected to be $3.70 for 2013, up from $3.28 in 2012 and $2.82 in 2011—excluding the $558 million ($1.64/share) impairment loss on Hussmann.

Blount, the outdoor-related equipment producer, having completed key acquisitions in 2011, including Woods Equipment and KOX GmbH, appears to be bullish on the agricultural market and Europe. Even with focuses on acquisition integration and increasing its supply chain, Blount is expected to grow revenues 12% in 2012, yet margins are expected to contract slightly, given its lower-margin business acquisitions.

In an effort to ramp their supply chain, Actuant also completed key acquisitions, three so far this year—with Jeyco in February, Turotest in March and Alfta in July. The industrial product manufacturer has had a positive string of earnings beats and is expected to grow EPS next year by 8%. With a PEG ratio of 0.96, the company has convinced a couple billionaire fund managers to invest, including Israel Englander and Cliff Asness, both taking new stakes in the company during the second quarter.

Of the peers mentioned, it does appear that Mueller has gotten out of line with regards to its valuation. The peer average P/E is 16.5 (Ingersoll 17.6x, Blount 16.6x, Actuant 15.4x), while Murrell trades at 23.5x. This is not to say that Murrell does not have promising prospects, with next year’s EPS expected to grow 28% and a forward P/E of 15.4, but at its current price, we believe that Murrell is fairly valued.

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