By BRETT ARENDS
Steinway & Sons has a brand name to die for. It's been more than 150 years since German immigrant Henry Steinway first began making pianos in a loft in New York. Today the company's famous name is almost synonymous around the world with the finest concert grands.
Are they the best in the world? It's a matter of personal preference. But Anthony Fogg, artistic administration of the Boston Symphony Orchestra, notes that the majority of major concert halls around the world use Steinways. That says a lot. The BSO has two nine-foot Steinway concert grands, he says -- one made in Germany, one in the United States.
If you want your own Steinway, prices start at around $55,000 and can go as high as several hundred thousand dollars.
If that's too high, try something a little cheaper. For just $25, plus dealing costs, you can become a part-owner in the company that makes them. If you want to fancy up your living room, trying hanging the stock certificate on the wall.
Steinway Musical Instruments (LVB)
Steinway is in advanced talks to sell off its lesser-known band instruments division to a team led by two board members. That will leave the company free to focus on its core strength: pianos. If they go ahead with the plans, it will create a fascinating situation. Steinway will look like a very cheap stock in relation to sales, earnings or its brand name. And it may prove an attractive takeover target.
Last week the company said it hopes to sell the division for about $76 million, including cash, a $7 million note, and $39 million in assumed liabilities. Talks continue.
Let's talk numbers. Steinway stock currently trades at $25.50. There are 12.4 million shares in issue, meaning the company overall is valued at $316 million.
At the year end, the company had about $266 million in cash, other current assets, and prepaid taxes, compared to just $177 million in total liabilities. So anyone buying the company outright for $316 million would have effectively got $89 million of their money back.
The proposed deal on the band division, by bringing in a net $76 million, would lift that instant dividend to $165 million. In other words, net of cash and other liquid assets and liabilities, the equity of Steinway's piano business, as a standalone company, is really only being valued today by the stock market at around $150 million.
How does that compare with the fundamentals?
Last year the piano business took in $216 million in revenues, and booked $77 million in gross profits -- up from $64 million in 2010.
The company also reported $102 million in general operating expenses and overhead, spread across pianos and band instruments. Pianos accounted for 62% of total group sales. If they also accounted for 62% of general costs -- which is the usual rule of thumb -- that would come to another $63 million, leaving the piano business with $11 million in pretax profits.
But the businesses appeal is rather better than these numbers would suggest.
The piano business is in flux. You can now buy new electronic pianos which offer a pretty decent experience, for amateur players, for a couple of thousand dollars. (For space considerations we have one in our home). These have taken some of the low-end piano market from traditional manufacturers, and may take more.
How much might that affect Steinway? The company has two mainstream brands: The lower-cost Essex and mid-market Boston pianos. Both are made in Asia. These account for three quarters of the pianos it sold last year, but barely one-fifth of the profits. Both might be vulnerable at some point, especially Essex.
But they aren't why someone would buy this stock. The jewel in the crown is the business making luxury high-end Steinways. These are luxury goods, made by skilled craftsmen in New York and Germany. Steinway only sells about 2,000 of them a year, mainly to concert halls, professionals, devotees and the very rich.
Steinways accounted for nearly 80%, or about $168 million, of the company's piano sales last year.
In other words, even if you shut down the lower-margin Boston and Essex brands -- or sold them to someone else -- the Steinway grand piano business on its own is being valued today at less than one times sales.
I know they're not strictly comparable, but luxury goods giant LVMH trades at 2.7 times sales, Cartier parent Compagnire Financiere Richemont at 3.4 times sales, and Tiffany & Co. at 2.5 times sales.
Last year Steinway's entire piano business also booked $77 million in gross profits, up from $64 million in 2010. If the standard rules of economics apply, most of that would have come from the high-end Steinways.
One of the best stock-pickers I know told me last week he'd be happy to own Steinway Musical Instruments stock at the right price: "The customers," he noted, "are fanatics." This is one of those brands that you could bet on long-term. There's a very good chance that in ten or twenty years time Steinway pianos will still be dominant at the high end.
And there is plenty to go for. China is now the world's second largest piano market, but so far Steinway has a small share. And around the world the newly-rich, from Hong Kong to Houston, are on a roll and are indulging their taste for conspicuous consumption and luxury goods. Last year just 2,100 Steinways were sold, at an average price of $85,000.
Luxury brands are a great business to own in general terms. New brands are difficult to build, and take a long time to do so, so the ones that already exist have a lot of value.
Steinway would make an attractive takeover candidate -- for an LVMH, a private equity investor, or a company in the music business. South Korea's Samick Musical Instruments already owns 33% of the stock, and chairman Jong Sup Kim is on the Steinway board. Last year the company also eliminated the two classes of stock, making a bid easier for an outsider.
And if nothing happens, you'll always have that stock certificate to hang on the wall.