Initiation of Research Coverage: Blount International, Inc.

Wednesday, September 5, 2012

William Blair & Company initiated research coverage of Blount International, Inc. (BLT $12.91), the top global supplier of saw chain, with an Outperform rating and Core Growth company profile.

Analyst Lawrence De Maria estimated that the company would generate cash earnings per share of $1.20 in 2012, $1.50 in 2013, and $1.81 in 2014.

“Blount is a relatively underfollowed name with attractive investment attributes,” De Maria said. “As the top global supplier of saw chain, the company possesses a large, consumable revenue stream. The saw chain market has grown at an average compound annual rate of 5% over the past 40 years, with only one down year since 1996, according to management. In addition to continuous replacement (saw chain lasts an average of about two weeks for professional users) of an increasing installed base, the market is benefiting from the trend toward more chain saw cutting than hand cutting, particularly as emerging markets develop. The stability of its businesses gives Blount the flexibility to employ a large amount of low-cost debt to pursue incremental growth opportunities and develop new and adjacent markets, such as farm implements. Expansion into these adjacent agricultural implement markets offers growth and margin enhancement opportunities. In addition, increasing internal focus and strategic capacity additions should lead to lower-cost production and margin expansion.”

De Maria continued, “While revenue and operating performance have been challenged in 2012, the company’s backlog and lowered expectations give us comfort that Blount’s revised guidance range is now achievable. We believe earnings will recover in 2013 after a difficult macroeconomic backdrop, inventory destocking, and acquisition integration issues hampered 2012 performance. We see the possibility for trading multiples to expand over time given the depressed 2012 outlook and potential 2013 recovery, and believe solid long-term free cash flow generation and capital-allocation strategies should create shareholder value.”

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