NACCO Industries (NYSE: NC) is a holding company with three wholly owned subsidiaries: (1) North American Coal Corp. (NA Coal), which mines coal and provides mining-related services; (2) Hamilton Beach Brands Inc. (HBB), which designs and distributes household appliances; and (3) The Kitchen Collection (KC), a specialty retailer of kitchenware.

NC currently trades at about 7x 2017E EV/EBITDA and with a free cash flow yield north of 10%. In our view, the shares are undervalued relative to the sum value of NC’s parts, particularly the HBB business, which generates 20%-plus returns on capital and could be an attractive acquisition or RMT target. Indeed, our analysis suggests that at current levels, investors receive the NA Coal business (as well as any potential optionality from KC) essentially for free.

Although NC is tightly controlled, management has shown a willingness to monetize assets and unlock value, as evidenced by two unsuccessful spin/merge attempts for HBB in 2006-2007 and the spin-off of Hyster-Yale (NYSE: HY) in 2012. Given the clear lack of inter-company synergies and management’s proactive history, coupled with the tenor of recent conference calls, which suggest a degree of shareholder frustration, and our contention that the shares are substantially undervalued, we think it is reasonable to suggest that NC at some point will pursue strategic alternatives to the benefit of shareholders.

Considering management’s financial commentary and peer and M&A valuations, value of $53 per share and $79 per share can be ascribed to NA Coal and Hamilton Beach, respectively. Kitchen Collection, for purposes of this valuation exercise, is assigned no value. Accounting for corporate costs and projected net debt of ~$27 per share yields a base-case sum-of-the-parts value of roughly $105 per share.

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