Value, or value trap?
Société BIC is the French family-run manufacturer and distributor of high-quality, but affordable, stationery products, lighters and shavers.
Founded in 1945 by Marcel Bich and Édouard Buffard and headquartered in Clichy, BIC is still controlled by the Bich family with a 46% economic ownership but 63% of voting rights.
While its products are sold in more than 160 countries around the world, sales are concentrated in the US (~43%), Western Europe (~32%) and Latin America (especially Brazil). It has however increased its presence in India with the acquisition of Cello in 2009.
It might come as a surprise, but despite selling boring (and for many, outdated) products, in 2022 it still registered €2.2 bn in sales and it’s either #1 or #2 globally in the segments it operates in.
Human Expression (37% of revenues, 11% of operating profits, ~6%-8% operating margin)
This segment used to be called “Stationery”, but it has now changed to highlight the transformation of going beyond writing instruments and into creative and digital expression. Most of the growth for BIC in this segment in recent years has come from acquisitions that diversified away from its traditional core business, notably Rocketbook (a leading brand in reusable digital notebooks) in 2021 and Inkbox (a producer of high quality semi-permanent tattoos) in 2022.
The pure writing instruments market is highly fragmented, with many local players and family-owned businesses: only three players (BIC, Newell Brands and Pilot) have over 5% of the global stationery market, with BIC at #2 with a 8.3% market share. BIC is particularly strong in its three main regions of operation: US (13% market share), Western Europe (17%) and Brazil (a massive 62%!).
The idea of moving from just stationery is to vastly enlarge the addressable market: overall, this broader market is growing at mid-single digit rates with an estimated TAM of €75 billion (vs just €19 billion for writing instruments).
Flame for Life (39% of revenues, 74% of operating profits, ~35%-40% operating margin)
Previously known as “Lighters”, this is the group’s profit engine and a highly regulated industry. Globally, the pocket lighter market is estimated at ~13 billion units, or ~€5 billion in value.BIC is #1 worldwide with c.55% market share (excluding Asia) and leading positions in key geographies: North America (>70%), Latin America (65%) and Europe (31%).
The competitive advantages supporting BIC's leadership position include safety, quality, strong brand awareness and a solid distribution network. A lighter is pressurised gas in a plastic reservoir that is lit by a flame: it can present a real danger if it is not designed and manufactured properly. For this reason, International Safety Standards protect consumers from unsafe lighters: ISO 9994 (basic safety requirements) and the more stringent child-resistant requirements. Unfortunately, more than 2/3 of lighter models sold globally do not comply with ISO 9994, and 90% do not comply with child safety standards. Markets that do not abide by any safety standard are dominated by low-cost/low-quality Chinese manufacturers.
More important: the standard perception is that sales of lighters are linked to smoking habits, when in reality between 2010 and 2020 the worldwide cigarette consumption declined by 1.2% annually but the pocket lighter market grew 2.0% in volume (and BIC lighters' sales have increased even further by 4.5% per year). Three quarters of flame devices usages are not linked to smoking but rather to other uses (candles, gas stoves, barbecues), a number that goes up to 90% in developing countries.
Blade Excellence (22% of revenues, 16% of operating profits, ~12%-14% operating margin)
This segment also underwent a restyling and is no longer simply “Shavers”. The Wet Shave market was about €11 billion in 2020and accounted for the majority (~56%) in value of the total “hair removal” segment. This market is split into three product segments: double-edge, one-piece and refillable. New products drive most growth within the highly competitive market environments of the one-piece and refillable segments by offering improved performance and added features.
In addition to the three historical leading brands (Gillette, Edgewell and BIC), other players, mostly online Direct to Consumer brands focused on lifestyle niches, have emerged over the last decade, primarily in the US and progressively expanded in other geographies.
Other products (2% of revenues, negative op profits)
This is a residual category that encompasses distribution to tobacco shops in France; batteries; and advertising and promotional products in Europe.
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Businesses in secular decline? Maybe, but still profitable
Realising (accepting?) that all its product lines were facing both competitive and secular challenges, in 2018 BIC began a corporate restructuring with the appointment of a new CEO (still coming from the Bich family). The plan mostly focused on reducing costs and complexity, for example by cutting the total stock keeping units (SKUs) by 20% from the initial level of over 13.000 by 2022/2023.
Growth has generally been trending down in every category, with shaving hit the hardest: the move away from one-piece disposable razors (90%-95% of BIC's shaver sales) and the entrance of well-funded discount providers like Dollar Shave Club and Harry's has been hurting the segment. This led to significant price cuts by Gillette, which caused a bloodbath particularly in the US. BIC is the #3 global player in the wet shave market, but contrary to Gillette and Edgewell (which owns the Schick and Wilkinson Sword brands) BIC has been primarily focused on disposable razors, not systems. With Gillette/Edgewell forced to find ways to generate profits across their entire shaving portfolio, they have relaunched more price competitive branded disposable products and, in Edgewell case, increased private label focus which is probably the biggest threat to BIC’s position. As a result, BIC is getting squeezed at both the high- and low-end and risks losing critical shelf-space at retail. At the same time, Harry’s has started to make inroads into retail stores, Amazon has recently jumped into the private-label razor business with its Solimo line, and Harry’s/Dollar Shave Club have started to go after the European DTC market and women’s razor markets. All of this adds up to more competition, lower margins, and more marketing / channel support for less growth in the US/Europe for BIC.
Growth in sales volumes (units) by segment
What is more surprising is that for lighters, despite the headwinds from e-cigarette adoption and the general reduction in cigarette consumption, operating margins have increased over the last decade, and today are consistently between 35% and 40%: this is a much better business than many (myself include) believe at just a superficial glance! BIC has a dominant share in many of the developed markets, scale and efficient global manufacturing operations, and some protection from competition by safety regulations in the US/EU, all of which help support high operating margins.
Operating margins by business line
While each segment has been facing pressure for years, BIC has been gaining share in each of them, which has somewhat mitigated the impact: average selling prices have increased for most sub-segments, or at least not fallen dramatically.
Average price per unit sold (in Euro cents) by business line
The second phase of the repositioning plan (still ongoing) is to go from being a manufacturing focused business to a consumer-centric one. Historically BIC made its money almost exclusively by producing huge quantities of reliable staple products extremely cheaply, utilising scale and manufacturing know-how; now the trick is to move into higher-value adjacent categories where consumer demand is stronger (hence the recent acquisitions) with the intention of generating higher margins and better profitability.
Indeed, future growth will mostly come from acquisitions in adjacent markets.
In stationery, BIC has traditionally focused on the low/utilitarian end of the market: going forward the company is working to expand the lines they participate in by adding products in the crafts area through bolt on acquisitions like the recently purchased hybrid digital writing device Rocketbook. BIC paid US$40 million for the company when it had US$32 million in sales (so a 1.25x multiple) and was growing at 35%/year without any meaningful retail distribution or non-US marketing: in 2021 Rocketbook’s sales were up 55% and +20% in the first 9 months of 2022.
Similarly, BIC paid US$65 million for Inkbox, which had US$27 million in sales (2.4x multiple) at 60% gross margin and growing at 44%/year before BIC’s acquisition. Inkbox will complement BIC’s own skin care offering in temporary tattoos Bodymark, launched in 2018.
In lighters, the strategy is generally to keep doing what they've been doing but to augment their market position by purchasing higher quality brands, providing more personalisation of their standard products. So BIC paid €40 million for Djeep, one of the leading manufacturers of quality lighters which had €14 million in sales (2.9x multiple). In 2021, added-value lighters, including Djeep, represented 36% of BIC’s total lighter sales, on track to reach its 50% objective by 2025.
Over the last two decades BIC has shown a remarkably resilient profitability by using little to no debt (it actually has a net cash position of c.€350 million as at Sept. 2022): ROIC, and ROE, have been trending down since the beginning of the new millennium, but have not been falling off a cliff: and the Covid dip has already largely been recovered in 2021.
Similarly, cash flow generation has remained robust, although capex has been quite variable and less than D&A in the last few years: again, growth will mostly come from acquisitions, not reinvesting in the existing businesses.
BIC’s future capital allocation is based on two pillars:
Fund profitable growth, with equal investments in capex and targeted acquisitions (€100m/year for each)
Ensure sustainable shareholders returns: the pay-out ratio for ordinary dividends will be 40%-50%, and there will also be regular share buybacks
This should allow for a sustainable growth in the mid-single digit and a €200 million run rate FCF generation.
Currently, BIC has a market cap of slightly more than €3 billion and, with €350 million of net cash, an enterprise value of ~€2.7 billion.
It trades at a 2022e P/E of 13x (15x the average earnings over the last 5 years, including 2020), EV/EBIT of 8x, “normalised” FCF yield of 6.6% and 3.7% dividend yield.
If we look at the past, BIC reached a high of €150/share in 2015, when EPS where 1.5x-2x higher than today, but a P/E of 22x was quite rich for a company with little growth. The market price was again close to €100 in late 2018, when the P/E was 18x.
Over the last 5 years, BIC has performed more or less in line with Edgewell and Pilot, and much better than Newell Brands: it is up 30% over the last year.
Growth declines faster than anticipated
Competitive pressure erodes margins (including lighters)
Execution: the company is going to spend €100m/year on acquisitions, so being able to integrate the newly acquired entities and extract sales synergies are paramount
My two cents are that BIC is not a long-term holding, but rather a “cigar butt” as per Buffett’s definition: most businesses are indeed in secular decline, but not really at risk of disappearing (especially lighters: shaving is a more challenged segment, while stationery is also in decline but COULD see some improvements from moving into new areas).
Despite shrinking end markets, BIC remains a well-run owner-operated business: 1) continued profitability and decent ROIC; 2) a demonstrated ability to acquire and integrate new business lines as part of a new growth strategy; 3) a strong financial position, and 4) a long track record of shareholder friendly capital allocation.
The key for long-term success remains BIC's ability to expand its TAMs and begin growing the business(es) again: this is not just some pipe dream fantasy, but it does come with execution risks. On the positive side, BIC is not planning to make a large, transformative acquisition (at least according to management), is not stepping outside of its comfort zone, and is not paying up for hot products in a desperate bid to stay relevant. The acquisitions made to date have been disciplined, have come at what look like attractive multiples and so far they seem to be reasonably successfully in integrating within existing product lines. On the negative side, secular trends remain irreversibly negative, and small, focused acquisitions will likely not be enough to invert them.
The current valuation is not demanding at all (although definitely not at distressed levels yet), and FCF generation should remain decent unless the reinvestment needs in stationery and/or shavings (marketing, distribution, etc.) in order to stabilise terminal value are higher than expected. While these investments are probably the right long-term business decision for the family, they are likely not what shareholders want: if incremental ROIC continues to be close to zero, they would prefer a sort of slow “liquidation” of the company via dividends and buybacks (not dissimilar to what tobacco stocks have been doing for years: reinvest the bare minimum in the business and give back all FCFs to shareholders). Given the family structure and ownership, BIC is also unlikely to be an acquisition target.
It's probably a better stock to trade rather than own, especially if it should trade down to €50 (from the current mid-€60s level).
Euromonitor 2020, Creative Industries, IBIS World, BIC estimates
Global Pocket Lighter Market Report 2020
Euromonitor 2020 Wet Shave Market
The composition of items sold within each segment has changed over time, so this comparison is not 100% precise. Still, average selling prices show that the “value” to clients of these essential but affordable products is not disappearing. On the other hand, however, these are mostly commoditised products, with little differentiation and zero pricing power, where by definition the winners are the lowest-cost producers.
It should be noted that these accounting metrics are, as usual, the “legacy” ROIC/ROE, that is the returns earned on the historical invested capital (including intangibles like know-how, distribution, brand, …). What is more important is the incremental ROIC that the company can earn from today on. NOPAT has slightly decreased over the last 5 and 10 years; to complicate the calculation, invested capital has also decreased over the same periods (mostly because of a decrease in debt and pension liabilities). Everything considered, incremental capital is close to zero over the last 10 years.