Dear investors,
TIKR.com makes these ideas possible. It’s the best source of high quality financial data (CapitalIQ), provides customisable screens for 100,000 global stocks (the best feature, imop), analyst estimates, valuation metrics, transcripts, and ownership matrices. I’ve used the Bloomberg Terminal, and believe me, this is the most comparable platform at a much cheaper price: one month for $15 (a 25% discount). Check it out here.
Thesis overview.
French Societe Bic is a stalwart consumer products firm that sells lighters, pens, and shavers across the globe. A recent sell-off, perhaps due to poor pandemic results and concerns about ESG performance, has opened up a compelling re-rating and turnaround situation that could produce great returns.
Valuation.
Reproduction Value.
As of Q3 2021, SB had a book value of €1,683 million. The last annual report containing detailed footnotes was released in December of 2020 and is therefore stale. I cannot make accurate adjustments to get a better idea of the firm’s true reproduction value.
Earnings Power Value.
An earnings power valuation (EPV) - assuming no growth - is ideal for a mature firm such as Bic. The steps of this valuation are described below. All averages are based on the most recent five-year period, which I believe to be most representative of typical business conditions.
Multiplied average revenue by the average operating margin to obtain EBIT of ~€283 million.
Used EBIT and the average effective tax rate to calculate NOPAT of ~€193 million.
Added back 20% of average SGA (~€97 million) and all of average R&D (~€33 million) under the assumption that these were ‘excess’ growth-related expenses. Also added back average non-operating income of ~€7 million. The result was an adjusted NOPAT of ~€330 million.
Subtracted the difference between average D&A (~€106 million) and an estimate of average maintenance capex (~€130 million) from adjusted NOPAT to obtain ~€305 million.
Discounted €305 million at a WACC of 8%. This rate reflects the firm’s low risk driven by lack of debt and stable demand for Bic’s products, and yields a gross EPV of €3,816 million.
Made an adjustment for net cash of €334 million. The final net EPV stood at €4,151 million.
Total Intrinsic Value.
Averaging the EPV and the reproduction value leaves me with an equity value estimate of €2,917 million. The wide gap between the book value and earnings also implies a competitive advantage, explaining Bic’s high 5-year average return on invested capital of 16%. The firm’s current market cap is €2,100 million.
Relative Valuation.
Bic trades at an obvious discount relative to its peer group although it sports a free cash flow yield on enterprise value of 17.6% and a relatively high return on invested capital. Assuming a reversion to Bic’s historical average P/E of 17 and P/S of 2 for the period 2004-2020, and using TTM revenue and earnings, we could see a share price of €88.4 or €79.5. The current share price is €50.2.
Business overview.
Bic is a French company that sells lighters, pens, and shavers in more than 160 countries. Its sales channels include retailers, traditional stores, physical Bic stores, and e-commerce. 25 factories across the globe produce 92% of the firm’s products. Bic’s geographical revenue split includes North America (43%), Europe (32%), and Developed Markets (25%).
Market trends, such as sustainability concerns and digitisation, call into question the continued viability of Bic’s traditional product offering, which includes classic stationery (pens, pencils), mass-produced, plain-design lighters, and disposable one-piece plastic shavers.
Management is not asleep at the wheel. On the contrary, the 2020 annual report outlines the “Horizon” plan for an overhaul of the firm’s products to match the aforementioned trends. In general, the strategy is to transform the company from a focus on manufacturing and distribution to a value-driven consumer-orientation. Let’s take a look at each of the firm’s three segments and how they are being adapted.
From Lighters to ‘Flame for Life’.
Pocket and utility lighters comprised 35% of Bic’s total sales in 2019. This is Bic’s most profitable segment, with an operating margin of 36.5%. The size of the global pocket lighter market was estimated at €4.7 billion in 2019, and Bic is a clear market leader, with 57% of global market share (by value, not volume). Runners-up are Asian Player (32%) and Flam Agas (6%). If we dig deeper, we find that Bic has a dominant, 70% value share in North America 70% in LATAM, and 35% in Europe.
Volume paints a different picture - Asian manufacturers account for more than half of the global market share in terms of units. However, these lighters are low-quality and rarely meet rigorous safety standards. Bic checks those boxes and has therefore maintained its market share.
Lighters are of course associated with smoking. In developing countries, 63% of flames are used to light tobacco compared to 31% in developed nations. The segment is therefore exposed to the tobacco industry, which is surviving mainly due to its pricing power (and some lacklustre innovation, exemplified by Philip Morris). This is undesirable, but is it seriously problematic for the segment? The worldwide decline of smoking seems certain, but this will take time - enough time for Bic to invade other markets.
Bic’s rehashed focus is on the production of innovative and customised lighters that fit all flame occasions, from smoking to lighting barbecues, logs, and candles. Although the strategy is in its early innings, there has been movement. Bic acquired Djeep, a producer of quality, decorated lighters, in July 2020 for a consideration of €40 million. Djeep had net sales of €14 million in 2019, which would equate to a price-to-sales multiple of ~2.8. Growth was there, but the exact rate was not specified. Synergies are obvious: Bic can leverage its manufacturing and distribution expertise to grow Djeep whilst latching onto the personalisation trend and maintaining stringent safety standards.
Bic also launched the EZ Reach utility lighter in 2020 - marketed by none other than Snoop Dogg - which combines the practicality of a pocket lighter with the usefulness of a utility product.
From Stationery to ‘Human Expression’.
The stationery segment brought in 40% of revenue in 2019 at an extremely thin operating margin of 3.5%. As Bic’s most ‘old-school’ segment - few people would choose to make notes using pen and paper over typing these days - this is not surprising. The segment is in dire need of a turnaround.
The writing instruments market was estimated to have a size of €18.4 billion in 2019. It is fragmented and only has a few top players. Bic is one of these, with a global market share, by value, of 8.7%. That’s second only to Newell by approximately 1-2%.
Instead of limiting itself to the manufacture of writing instruments, management wants to expand to adjacent markets that also fall under the umbrella of human expression. These include arts and crafts (e.g., colouring, finger-writing, watercolours), skin creative (e.g., temporary tattoos), and digital writing (e.g., styli for tablets, reusable notebooks, slate tablets).
Overall, human expression is estimated to have a total addressable market of €80 billion by 2025, and a mid to high single-digit growth rate. In 2019, writing instruments comprised 31% of this market, with arts and crafts making up 58%, and skin creative and digital writing rounding out the rest at 7% and 4%, respectively. The opportunity certainly seems attractive.
Management’s plans have been put into action with the acquisition of Rocketbook in December of 2020 for a consideration of €33 million. Founded in 2014, Rocketbook is a high-growth, profitable manufacturer of reusable notebooks, with 2020 sales of €26 million, up 35% year-over-year. That equates to a cheap price-to-sales multiple of 1.3. At this point, I’m confident that management is wary of overspending when it comes to bolt-on acquisitions. Better yet, in Bic’s Q3 2021 results release, management stated that Rocketbook sales were up 90% YTD relative to the equivalent prior year period. Bic’s world-wide scale is sure to produce valuable synergies, as with Djeep. I’ll be watching this space closely in upcoming financial reports.
From Shavers to ‘Blade Excellence’.
In 2019, the shavers segment produced 24% of revenue at an operating margin of 15%. Bic’s positioning in this market is weak relative to other segments. It has a 7% share of the €11.8 billion wet shave market, with Edgewell holding 13%, and Gillette (Procter and Gamble) occupying a daunting 58%.
Gillette’s economies of scale and branding presumably place Bic at a disadvantage, but a closer look suggests that the outlook is not at bleak as it seems. The wet shave market can be broken down into refillable, one-piece, and double-edge segments. Bic holds a much more respectable share in the non-refillable one-piece segment than it does on the whole, with 29% in the U.S.A, 23% in Brazil and France, 14% in the UK, and 13% in Mexico.
This produces images of disposable, low-quality plastic shavers, and although this is partly true, simple consumer-friendly and sustainable changes can be made that will sustain this business. For example, Bic recently launched a carbon-neutral, plastic-free razor with a bamboo handle. Product innovation and a full pipeline are crucial in this segment, and Bic’s innovation and R&D capabilities are notable. The firm develops 15-20 new products for the segment annually. Recent launches include the BIC Flex Hybrid 5 for men and the BIC Soleil Click 5 for women.
Back to Gillette. Its dominant market position, particularly in the high-end branch, cannot be infringed upon. However, the disruption of the wet shave market, driven by smaller players that use an online direct-to-consumer model, provides an opportunity. Bic has significant know-how when it comes to blade manufacturing plus the capability to produce high-precision blades. It plans to build a new business by marketing this expertise and becoming a provider of blades to other players.
Other information.
The Bich family owns approximately 46% of the outstanding shares, and has overwhelming voting rights.
7.6% of sales are derived from innovations launched in the prior three years. The firm currently has 346 patents to its name, and wants to increase the number of new patent submissions a year by 20%.
In the past five years, Bic repurchased about €54 million worth of shares annually. That’s 2% of the current market cap.
By 2025, management aims to make 100% of its packaging recyclable, reusable, or compostable, and obtain 80% of its energy from renewable sources. 20% of products will contain non-virgin (not newly sourced) petroleum or alternatives (50% by 2030).
Management has named three serious risks: fading consumer demand and slowing categories growth, plastic and climate change, plus retail disruption and consolidation.
Bic has a 4-star rating on Glassdoor, and 79% of employees approve of the CEO, Gonzalve Bich.
Bic’s products have superb 4-5 star ratings across Amazon. So does Rocketbook.
17.86% of the firm is currently owned by value-oriented funds, compared to 1.5% in December 2017.
Why Is Bic Undervalued?
The pandemic had an adverse impact on the company, with net sales falling by 16.5% and operating profit by 42%. In addition, the stationery segment produced a historical record loss of €31 million, mainly due to the lack of a back-to-school trend. The recovery is in place, however, with 9M 2021 sales up 19.8% year-over-year on a constant currency basis, and adjusted operating profit up 41%. Adjusted EBIT margins also rose from 14.5% to 17.8%.
With the green boom came sustainability concerns. These are being addressed by the company. Across the board, Bic is rolling out more environmentally-friendly products. This change is also occurring on a higher level, with the firm igniting plans to reduce its emissions and climate impact. The pandemic-induced movement of everything from offline to online may have deterred investors too, since Bic is associated with a somewhat outdated business model. However, the company is targeting digital media in its key markets, and aims to derive 10% of its sales from e-commerce by 2022.
At its current valuation, Bic has an upside of 50%, which would see it match its intrinsic value and slightly exceed its peer valuations. The turnaround opportunity is practically ‘free’.