Should You Buy It? Hold Hillenbrand?

Hillenbrand IndustriesHB filed papers with the Securities and Exchange Commission Wednesday to initiate the breakup of its two businesses.

For readers who are not familiar with the 100-year old company, Hillenbrand's health care division, which accounts for about two-thirds of its total revenue, makes hospital beds and other equipment. The second business, Batesville Casket, is the largest casket-maker in the U.S.

Despite the apparent operating synergies between these two divisions, management believes that it can unlock shareholder value by separating the faster-growing health care business -- to be dubbed Hill-Rom -- from the higher-margin casket operations.

The exact details have not been given, but the split is expected to occur by March 31 and investors are expected to receive shares in both companies.

Hillenbrand's shares had little reaction to the news Wednesday, closing fractionally higher at $54.91. That's a far cry from the $69.45 that Hillenbrand reached last May 11, the day after it first proposed the breakup.

Given this news, should you buy shares in Hillenbrand? Can the company resuscitate its share price with this breakup strategy, or will the stock remain dead money?

At current levels, Hillenbrand is valued at 17 times expected fiscal 2008 (ending September) earnings of $3.23 per share. That represents a 5% discount to the company's average valuation over the past decade.

Even before the proposed breakup, Hillenbrand had positive operating momentum heading into 2008. The company posted fiscal fourth quarter (ended September) results Nov. 15 with earnings of 82 cents a share, a full 10% ahead of expectations.

Revenue grew 2% from the previous year to $530.2 million, driven by 17 new products introduced on the health care side of the business. This division posted 5.3% year-over-year sales growth in 2007, while revenue in the casket business fell 1.1%.

In addition to growing the top line, management is planning to improve margins in the new year by cutting expenses. The company purchased a manufacturing facility for its health care business in Mexico last year, and is also targeting low-cost materials suppliers in Asia.

Hillenbrand is also targeting the overseas market to boost its health care sales. In fiscal 2007, the company generated $314 million, or 15.5% of its total revenue outside of the U.S., compared with 12.9% the year before.

It's worth noting that the stock offers a 28.5-cent quarterly dividend (2.1% yield) that the company has increased for 36 consecutive years. The last payment was made Dec. 31, and given Hillenbrand's dividend schedule, I expect that management will boost the payment again in February.

The company can comfortably cover the dividend 2.8 times with expected full-year earnings. Hillenbrand also has an A-rated balance sheet with $194.3 million of cash and equivalents and a manageable 17% debt-to-capital ratio.

Hillenbrand is the kind of noncyclical defensive stock that I believe can outperform the broader market if 2008 continues to be a year that's defined by volatile trading and slowing earnings growth.

The company has sound finances, and I believe that readers should buy the stock before the breakup occurs. The breakup should help unlock shareholder value by allowing the market to place a premium valuation on the faster-growing health care business.