Bummer. I thought I'd found in door maker Masonite (NYSE:MHM) one of those Peter Lynch 10-baggers that Tom Gardner is always talking about: small company, dull industry, steady performer, ignored by Wall Street. Now the privately held leveraged buyout firm Kohlberg Kravis Roberts & Co. has knocked on Masonite's door and will take the company private in a $2.5 billion deal.
When Masonite climbed more than 30% since it was recommended in the second issue of the Motley Fool Inside Value newsletter, I bought shares in the company as both a show of faith in the investing prowess of my good friend, Philip Durell, who serves as the newsletter's chief analyst, and because I believed it was a darn good company, one that I had ignored even though I was very familiar with it.
As a former employee of Home Depot (NYSE:HD) in the millwork department, I'd see Masonite's doors flying off the shelves every day as the country's housing boom created some heated demand for its product. Low interest rates fueled the real estate sector, and someone had to put doors on all the houses going up. More often than not, it was Masonite, which has reported 10 straight years of rising sales, leading to its share price more than doubling over the past two years.
The door industry has been good to Masonite. It has 75 factories in 16 countries and employs about 14,000. Last year, sales in the U.S. alone were $1.8 billion. But the future expansion of Masonite was not here: U.S. sales growth was only 9%; some 32% of Masonite's growth over the past two years came from Europe, representing 21% of net income. That probably explains why the company made a deal in May for Kronodoor, which serves the Central and Eastern European markets from its manufacturing plants in the Czech Republic and Poland, and also bought a 50% stake in Malaysian door skin manufacturer Samling Strategic Corp. for $25 million.
Masonite has not been neglecting the U.S. market either, despite the lower growth prospects and slipping margins. In March, the company bought the entry door business of Stanley Works (NYSE:SWK) for $165 million. Even with the acquisitions, Masonite reported a 29% increase in third-quarter sales and a 20% increase in profits, and still had $125 million in cash. At the time, the company said it would use the money to make further acquisitions or pay off debt, which had risen 39% to fund the takeovers.
The all-cash deal with Kohlberg Kravis on its surface appears cheap. The buyout giant is offering about $32.22 at today's exchange rates or about a 13% premium over yesterday's closing price. Interestingly, that is the same value Philip Durell placed on it when he first recommended the company. Masonite's management will remain in place, but it'll be required to buy a 5% stake in the company's equity at the same price the buyout firm is paying for it.
Coming up with value-priced companies with the potential to be multi-baggers is not easy work, though Inside Value seems to be able to do it with aplomb, as the picks are up nearly twice the market's gain. Looks like it's time to scour the bargain bins again and see what opportunity knocks on my door.
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Fool contributor Rich Duprey has been known to scour Dumpsters for tasty treats. He owns shares in Masonite but does not own any of the other stocks mentioned in this article.
