No Comments from KerBer? Surprised we haven't heard from KerBer yet post results/restructuring update. I'm starting to wonder if he sold his position, or perhaps he is just travelling. Regardless his insights are always greatly appreciated.
Regarding the "proper" valuation multiple to apply to HEM, I would say that 10x is too low (that would be more for a low / no growth cash producing utility). In HEM's case there is growth, even if you look only at Claas and Agjunction. While the Claas deal is expected to contribute an incremental $10mm to sales next year that increases by 50% the following year (so a total incremental sales lift of $15mm). Add to that Agjunction growth and you have material upside to EPS in 2014 vs 2013. In other words you have to look at the P/E multiple in the context of EPS growth (e.g. a PEG ratio is one measure, but there are several others to consider).
Having said that one cannot deny that with 100% exposure to agriculture HEM is in a cyclical business (which can create some earnings volatility, although agjunction should help smooth this going forward), so taking a normal multiple (e.g. 15x to 18x) and applying to a mid-cycle EPS number should get you the target price. The question is do you think a 2013 EPS number is mid-cycle? I would argue not. In fact I would say that agriculture, despite its cyclicality, is in a long-term secular uptrend. That means the mid-cycle earnings for HEM should continue to increase over time. Problem of course is patience of investors. Listening to Benj Gallendar on the last call it was obvious he wants management to sell the company today vs. the strategy of fix it first then sell (the later will take time). Its not easy to be patient, but it can come with rewards and in HEM's case it could be significant. Fortunately our new CEO is now fully aligned with increasing shareholder value (afterall he is one of the company's largest shareholders). If as a shareholder he thinks the best way to get value for his shares is to execute the plan then that's what he'll do. Otherwise he'd be pushing for a sale of the business to the highest bidder today.
Next major hurdle/announcement we need is for the company to sell the non-core business. The amount of proceeds raised could go a long way to mitigating investor uncertainty.