Lifco: Careful And Steady At This Valuation

seekingalpha06-04

Lifco is a niche-specialty industrial conglomerate focused on profitability and developing strong, niche companies.The company has a stable financial performance with consistent profit growth and ...

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Tom Werner Dear readers/followers, In this article, we'll take a closer look at Industrial conglomerate Lifco (OTCPK:LFCBY) (OTCPK:LFABF), a business I reviewed back in January of this year, and where I now, 5 months later, am providing an update. As I expected, the company has not outperformed the market since my last article, which is one that you can find here, if you're interested. Lifco is a niche-specialty type business with a focus on dental technology, demolition/tools, and systems solutions, but its primary focus is on profitability. This can, of course, be said for most companies, but Lifco, in my mind, takes this to an entirely different level in how strongly and how clearly the company focuses on profitability as part of its M&A and for the companies it manages. I wish I was an investor in Lifco - the company has a lot going for it, and despite this one being undercovered, it's one of the companies I keep a very close eye on. Developing strong, niche companies is what Lifco is known for - and it's something it does very well. Let's see what we have as of the latest quarter and how Lifco may perform going forward. Updating Lifco for 2024 Q1 - plenty of upside, at the right valuation I usually don't like investment companies that acquire things willy-nilly - and Lifco does have an M&A focus on very key segments and parts of the market. However, when looking at the sheer number of brands, and above all, the variety in segments, you can easily find that this at times and with some things seems like a very odd mix.   Lifco IR (Lifco IR) One thing I like about the company is that Lifco doesn't sell businesses. It's a serial acquirer that doesn't \"sell\" businesses, which is a good thing if you're the type of investor who likes sticking with your investments and considers good companies to be worth holding on to, as I do. This would be the approach I myself would take if I were to run a conglomerate like that. Investments should be done to partake in a growth story - divestments shouldn't (almost never) happen. Also, Lifco isn't the sort of manager or conglomerate that does shakeups - usually it finds well-working businesses, it keeps decisions locals, there are no forced integrations, and Lifco has never moved a business physically from one location to another. This grants it a sort of believability and confidence when compared to many other acquirers and conglomerates that is both worth sticking to, but also worth admiring, as I see it. It also isn't interested in explosive profit or quick monetization - instead, it looks for businesses that grow in a stable manner over time. Because I can emphasize so much with these values, that's probably one of the reasons why I \"click\" so well with this business. This operational stability is also something the company enjoys internally. Very few employees of Lifco itself leave, and most of the management is recruit internally. The company's culture is based on minimizing bureaucracy, in a decentralized profit-oriented culture, promoting motivated, result-driven managers, and focusing on customers with potential for sustainable growth, rather than slightly ideas and castles in the air. The focus is cash flow, something Warren Buffett himself would be proud of. As of 1Q24, the trends were still good. Sales were up 0.8%, with a margin still above 21% despite EBITDA falling a bit, and profit down around 11% YOY, EPS about the same. This doesn't show all that much in the share price trends, as I see it. Here it becomes more important to look at Lifco over a product of several years, such as between 2015 and 2023, which shows us how the company's KPIs have evolved.   Lifco IR (Lifco IR) The company has managed a CAGR FCF of 22.8% per year, from 2014 to 2024 LTM, which is the year that the company originally IPO'ed. The company has also stayed incredibly stable in terms of leverage since that time, never rising above 2x net debt/EBITDA for more than a month or so before going back down, and now closer to 1.5x. Very conservative. The company's target is to increase profit every single year - just like one of my own underlying goals that I don't talk much about in my articles is to every single year, get more money in dividends/interest from my portfolio than the year before. And so far, this has worked wonders for me. This company as well. The company has not seen an ROCE below 20% in very many years, and this is with a target of around 12.5%, which means the company is well in excess of target levels. All of the current management, meaning the CEO, CFO, and Head of business, have been at Lifco for more than 15 years and the Chairman, Carl Bennet, owns almost 200M class B shares and over 30M class a-shares, with all other managers s(except CFO) being significant shareholders with over 200k shares each.   Lifco IR (Lifco IR) Lifco is a \"What you see is what you get\" sort of business, and this is pretty rare in this market. The company's focus is on the right people in the right place, price optimization, management structure, outsource non-core and focus on value, and cash flow focus - that includes the growth phase by the way. The company's focus on cash flow begins even with the company still in its so-called \"growth phase\". How good is Lifco at what they do then? I speak a lot about how good the company is, but where is the proof? How about here?   Lifco IR (Lifco IR) And this is just a small selection. The company is primarily a European sort of business. Over 50% of the company's holdings are here - with around 10% in NA and 8% in Asia/Australia. Lifco is a careful sort of business in what it chooses to go into, and geography is one of those selections. It does have continued focus areas. Dental is one of those - and it has sales across a variety of segments in the dental market, Prosthetics is only part of that.   Lifco IR (Lifco IR) Again, this is a very attractive set of markets and segments. Dental has increased sales at a double-digit CAGR since 2006 - same with EBITDA at 15% CAGR, with a margin expansion of 100% since the same time frame. This has become one of the company's specialty areas. Another good example is demolition/tools, which has seen growth of even higher rates, CAGR of 17.5% in sales, and 18.8% in 2020-2024 in EBITDA, with increasing margins to the 25%. In fact, all of the company's segments are continuing to \"push\" upward. The reason things went down in the last quarter was primarily negative operational leverage in Demolition & Tools. What is \"Negative operational leverage\"? This is \"business speak\" for the fact that despite increasing sales, profit decreases, which usually means that variable costs increase disproportionately with sales. This is exactly what is happening here - and it's not unique for Lifco either. This is also not a new thing, but we've seen a continued weak market for some time here. The fact that profit decreased even more than EBITA was related to higher financing costs - again natural, due to interest rates going up. The reason this quarter \"looks\" so bad here is also because the 1Q is typically a seasonally weak quarter - so it may pick up later. However, I wished that things would have reacted more strongly to this company's decline. This has not been the case though - Lifco is still very expensive, and this shows in valuation. Valuation for Lifco is high - the upside is limited here, I can't do anything but \"HOLD\" In my last article, I gave Lifco a price target of 175 SEK. I'm not changing my rating here, despite a solid upward trajectory. The fact is that current estimates are for the company to increase EPS at over 20% this year, only to then significantly slow down in 2025-2026 (Paywalled F.A.S.T graphs link). If you believe these forecasts, and even if you say that this company deserves a premium, you should be very careful here. Lifco currently trades above normalized 35x P/E which is around the level of its 5-year average, but well above its 10-year average. The 9-10 year is about at 28.5x - if you believe the longer-term trends, as do, then a realistic upside even given a 10% annualized growth rate for the next few years results in an annualized RoR of no higher than 2.5%.   Lifco Upside F.A.S.T graphs (Lifco Upside F.A.S.T graphs) As I see it, no investor, and especially those that follow me, should accept this. Remember, I look for 15% annualized or above, and I want this conservatively as well. This is not conservative, even if it's as conservative as it gets. I would forecast Lifco closer to 20-25x P/E, and that would put he company closer to my PT, but the returns very clearly negative. Even if you're a Lifco bull and argue that yes, the company should absolutely be worth 35x, then what you're arguing for is not even 11% annualized at this price and these forests. The yield is a big reason for this. Lifco only yields 0.76%. This is far, far worse than any savings account or money market fund at this time - it's another big reason I \"don't like\" what's going on here in terms of valuation, and why I remain skeptical. Analysts give Lifco a range starting at a low of 260, almost 100 SEK above my targets, and a 295 SEK high. However, that's only 2 analysts- one with a \"BUY\" and one with a \"HOLD\". There isn't much we can garner from this, as I see it. Lifco could go on to outperform further if the market continues to premiumize as it has - but I wouldn't bet my money on it. I believe that given the combination of the low yield and over 35x P/E valuation, this company now \"deserves\" to come down, and I consider that coming down to be likely in the next year or so. When it does touch below 200 SEK, if it does, I'll start lining up funds, but until then, this is like window shopping. I'd love to own it, but it's too expensive. My current thesis for Lifco is as follows. Thesis  Lifco is a market-leading industrial conglomerate with attractive companies in several key sub-sectors. The company is well-managed, with a good history and a good long-term upside. I view operational risks as very low/non-existent to this company. Far more relevant, I view the company's valuation as the main deciding factor as to why you should be investing, or not investing, in the company. At the current price, I view Lifco a \"HOLD\", and very likely to result in sub-par returns if you were to invest at this time. I would give Lifco a price target of no higher than 175 SEK/share.  Remember, I'm all about : 1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime. 2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1. 3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows. 4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1. Here are my criteria and how the company fulfills them (italicized).  This company is overall qualitative. This company is fundamentally safe/conservative & well-run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside based on earnings growth or multiple expansion/reversion.  Because of the company's pricing and valuation, this company cannot be a \"BUY\" here, but a \"HOLD\".  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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