UK's Old Economy Enodis to Debut on Big Board

LONDON -- Certain large U.S. mutual funds have made a killing bottom-fishing Britain's beaten-down Old Economy stocks. Now U.S. investors will have a chance to do the same when shares of Enodis, a food-service equipment manufacturer and building company, lists American Depositary Receipts on the New York Stock Exchange Wednesday.

Unlike the professionals, such as Fidelity, which first bought shares of Enodis years ago when it was called Berisford, the average U.S. investor will be coming late to this turnaround game.

Enodis shares have nearly tripled since a mid-'90s restructuring transformed the company from a commodities to an engineering concern. On Tuesday, Enodis closed at 307 pence ($4.64) in London. That places the stock at eight times trailing earnings, which looks dirt-cheap compared with tech stocks that can command triple-digit P/E ratios . But compared with other stocks in its sector, Enodis is starting to look expensive, say some analysts and money managers who caution against buying the shares at these levels.

Added to those valuation issues are concerns about the cyclical nature of Enodis' business, which tends to trade in sync with economic expansions and retractions. With the U.S. economy, which accounts for two-thirds of Enodis' revenue and earnings, entering the late stages of an expansion, a slowdown is already occurring.

Moreover, the company's strategy of consolidating the fragmented food-service equipment business could run into problems as Enodis' financing becomes stretched.

"I probably wouldn't buy shares at this level for those reasons," says John Hatherly, head of global analysis for M&G Group, which bought into Enodis' turnaround early and still owns shares.

Hatherly adds that even with the best management, Enodis' shares should sell at a discount to the market, given the slow-growing industries in which it operates. Enodis gets three-quarters of its sales and nearly as much of its profits by supplying restaurants, mainly in the U.S., with everything from refrigerators to stove tops. The balance comes from a building- and consumer-products division and property holdings. "The question is how large should the discount be."

To a bevy of bullish analysts, Enodis' current discount is far too great. That sentiment is shared by Enodis' management, which views the shares as too undervalued to merit a new issue and has instead repackaged existing shares at a ratio of four ADR shares to one ordinary share.

Enodis' Chief Executive David Williams says the concerns are unfounded. In an interview with TSC, he pointed out that during the last recession, U.S. food-service sales declined by a measly 1%. He adds that the company's plan to double its share to 12% of the $24 billion global food-service market, mainly through acquisitions in Europe and Asia, will make Enodis less dependent on the fluctuations of the U.S. economy.

So far, Enodis has had success acquiring U.S. competitors, cutting costs and cross-selling products -- a strategy that has allowed the company to grow at double the industry average.

For instance, Enodis bought Scotsman, the U.S. refrigerator concern, last year for its strength in cooling products, which complemented the company's Welbilt division, which has a strong heating and cooking line. Meanwhile, Enodis is on track to cut 10 million in costs from Scotsman by September 2001.

Those results will help profits before taxes for the year ending September 2000 jump 50% to 105 million, according to brokers surveyed by Hemscott, a financial information company. Sales are expected to hit 1.1 billion, up from 756 million a year ago.

It's that performance that has analysts such as Tim Adams, Schroder Salomon Smith Barney, rating shares a buy with a price target of 400 pence, or 30% above the current level. Adams wasn't immediately available for comment, and it wasn't known if his firm has performed underwriting services for Enodis.

Skeptics, however, wonder whether Enodis will be able to maintain the pace of acquisitions given its debt load. Although the company's free cash flow (aided by a tax break) will help it reduce debt to 380 million, from 499 million at the end of 1999, certain analysts worry that the company's interest cover, pretax operating income divided by interest obligations, is still too low. The higher the number, the more financially secure the company. Enodis' interest cover currently hovers around 4.

"Their financing is a bit stretched," says Mike Monkton, an analyst with UBS Warburg, who rates shares a hold. His price target is 330 pence, or near current levels, and his firm hasn't provided underwriting services for Enodis.

CEO Williams disputes that notion. He says the company would be able to maintain a 200 million war chest and still take its interest cover down to three times. He adds that the sale of property and noncore assets could raise more funds.

One noncore asset that's been speculated to be on the block is Magnet, part of the building division, which could be worth about 200 million. So far, however, there have been few takers.

"The price hasn't been [low] enough to bring buyers to the negotiating table," Monkton says. "There's a substantial gap regarding what the buyers would pay and what Enodis thinks the business is worth."

Enodis, itself, may be facing a similar problem as it attempts to sell shares to American investors.