Sunday, January 22, 2017

Linamar and being entrepreneurial

As Linamar was one of Meryl Witmer's picks for the 2017 Barron's Roundtable, I thought I'd post another of the excerpts I have saved from the excellent book on the company and its founder, Driven to Succeed: How Frank Hasenfratz Grew Linamar from Guelph to Global
If there is one word that captures the corporate culture of Linamar, that word would be “entrepreneurial.” The 1994 annual report featured a short essay on the topic. “An entrepreneur is defined as someone who runs a business at his own financial risk.” 
...Frank has his own definition. “To be an entrepreneur, you’ve got to believe, follow through, and never give up. A lot of entrepreneurs fail because they don’t recognize when it’s time to change,” he said. “You can teach someone to be an entrepreneur by teaching them to truly believe in themselves. But the problem is when you believe in yourself so much you come across as being cocky. If you ask me what did I do wrong in my life, I’d have to think about it. I can find it in the archives somewhere, but I don’t harp on it, it happened, it’s done, let’s move on. I don’t get headaches, I give headaches.”
And here was Witmer's thoughts on the company and its valuation: 
Witmer: My next pick is Linamar [LNR.Canada]. It is a global auto-parts supplier, based about an hour from Toronto. The stock price is 60 Canadian dollars [$45]. There are 66 million shares outstanding, and the market cap is C$3.9 billion. Linamar has two segments: powertrain/driveline and industrial. The former generates about 80% of operating income. The company utilizes precision machining, casting, and forging technology to make powertrain and driveline components for automotive OEMs [original equipment manufacturers]. Linamar focuses on sophisticated components that are lightweight and fuel-efficient. 
What does the industrial division do? 
Witmer: It makes aerial work platforms, such as scissor lifts, under the Skyjack brand. There are two major competitors: Terex [TEX] and OshKosh [OSK]. Linamar purchased Skyjack in 2001-’02 for $32 million. Skyjack is on track to earn $140 million, pre-tax, in 2016, so it was a good buy. Linamar was founded by Frank Hasenfratz, a remarkable man. An ethnic German, he was born in Hungary and fled to Canada in the 1950s after the Hungarian uprising against the Soviets failed. The Canadian government gave him $5 and sent him on his way. Frank had an advanced skill set as a machinist from an apprenticeship in Hungary, and started a predecessor to Linamar in 1964 in his basement. 
In 2002, his capable daughter Linda took over as CEO. She has a chemistry degree and an M.B.A., and started on the shop floor. Together, they own about a third of the stock. They think long-term about growing the business and achieving 20% pre-tax returns on capital. The company is relentless about keeping costs low through process efficiency and product innovation. Every plant manager at its more than 50 plants worldwide is responsible for his or her own P&L [profit and loss]. Despite its growth, Linamar has retained an entrepreneurial culture. 
Linamar is benefiting from the trend toward outsourcing powertrain and driveline manufacturing, the last major area of automotive production that is still done partly in-house. OEMs realize they can achieve better and more cost-effective results by outsourcing. Linamar is well-positioned to garner new business as a trusted supplier. It often has sole-source status as a supplier on these critical elements. It can grow through a downturn. If North American vehicle sales fell by one million units, Linamar would lose only about $150 million of revenue. While it is valued like a run-of-the-mill auto supplier, it deserves a higher valuation. 
What would you give it? 
Witmer: The company projects that with flat automotive production, revenue will grow by about 30%, from C$6 billion to more than C$7.8 billion over the next four years, based solely on new business wins it has already signed. Past projections have been conservative by about C$500 million. We estimate that Linamar will earn more than C$7 a share in 2016, growing to more than C$9 a share by 2020. The stock could trade north of C$90 a share in a few years, based on a pricing/earnings multiple of 10. We’d argue a multiple of 12 is more appropriate, producing a target price of C$110 a share.