Blue Rhino Is Cooking with Gas


There are any number of explanations for America's taste for barbecue. It harks back to frontier days, for instance, when food was cooked over an open fire. There's the tangy taste, of course. And today, convenience also is a factor.

No longer does charcoaling, as it used to be called, mean piling high the briquettes, dousing them with enough lighter fluid to run a subcompact, igniting a pyre that can melt vinyl siding -- and then waiting half an hour for the fire to achieve that just-right, ash-dusted glow before the actual cooking can begin. Instead, some 48 million U.S. households, an estimated 61% of all patio chefs, now use propane-powered grills on which they can prepare meals in only a little more time than it takes to wash charcoal dust off dirty hands.

HUNGRY MARKET. All of which has created an opportunity for Blue Rhino (RINO), which is based in Winston-Salem, N.C. Billy D. Prim, its co-founder and CEO, was just another president of a propane-distribution company back in 1994, when he noticed that customers buying grills at the local Wal-Mart couldn't get gas at the store. That's because federal law requires that tanks be filled only at licensed stations, not at retail or convenience stores. "It was like buying toys without the batteries," Prim recalls. "The customer couldn't take a grill straight home and have a cookout."

So he persuaded some local stores to keep filled tanks on hand, ready for grill buyers -- or for those who simply wanted to exchange an empty tank for a full one. He guessed, correctly, that backyard chefs would pay a big premium to avoid the hassle of hauling their empty tanks to a refill station after every 16 hours-or-so of cooking. "I saw a huge opportunity in making tank fill-ups more convenient," Prim explains. "These days, it's all about instant gratification."

It sure is. From a standing start in 1994, Blue Rhino has become the market leader in the business of exchanging -- as opposed to refilling -- propane tanks for gas grills. For fiscal 2002 ended July 31, Blue Rhino says revenues climbed about 33%, to $185 million -- about 62% of that from its tank-exchange business and the rest from sales of the outfit's UniFlame grills and barbecue accessories, a business it purchased in 2000.

HOT NUMBERS. According to analysts polled by Thomson Financial/First Call, Blue Rhino's 2002 income should come to $3.9 million, or 46 cents per share, vs. a loss of $4.7 million in 2001. The catalyst for that surge, notes Jenny Hubbard, a senior analyst with Nashville-based research firm Avondale Partners, was a 29% year-over-year increase, to $112 million, in cylinder-exchange revenue, and a 29% jump, to $68 million, in UniFlame sales.

In fiscal 2003, Prim expects revenues to reach $218 million, an 18% increase. He foresees a 20% increase in operating income, to $25 million before interest, taxes, and depreciation. Hubbard predicts a 25% jump in tank-exchange revenues in fiscal 2003 along with a 21% increase in UniFlame sales.

As a consequence, Hubbard thinks the stock is undervalued and rates it a near-term and long-term strong buy. She expects Blue Rhino to hit $15 a share within a year, vs. its $11.40 closing price on July 31. Kenneth Smith, an analyst at SunTrust Robinson Humphrey, initiated coverage of Blue Rhino in June with a buy rating and a 12-month price target of $18. Neither Hubbard nor Smith currently owns the stock.

SMELLY PLACES. Blue Rhino's rosy outlook owes much to the legendary impatience of U.S. consumers, as well as to new propane-tank safety guidelines that already have been adopted by 25 states. Most gas grills come with a propane tank that has to be refilled, normally at the local hardware or garden store, for a fee of about $10. Though the process usually is no more trouble than getting your car filled at a full-service gas station, it has a couple of drawbacks. Propane refillers aren't especially numerous or easy to find -- and their petroleum-scented stations lack, shall we say, ambience.

To solve both problems, Blue Rhino has established a solid foothold at 27,000 retail locations, including Home Depot and Wal-Mart, which sell tanks that Blue Rhino contracts to have filled off premises. At the Home Depot in Jersey City, N.J., exchanging an empty Blue Rhino tank for a full one costs about $20. It makes sense for retailers because they get "a 30% profit margin on transactions, as well as increased foot traffic," says Avondale's Hubbard.

And Blue Rhino, whose gross margin on propane sales is now 25%, commands about half of the estimated $150 million propane-cylinder exchange market, vs. 20% for its nearest competitor, the AmeriGas unit of UGI Corp. in King of Prussia, Pa.

HEAT IN THE KITCHEN. Prim is pinning his plans for further growth on three factors. For starters, the popularity of exchange services is growing: About 30% of all standard gas-grill cylinders were exchanged in 2001 -- up from 25% in 2000 and less than 5% in 1995, according to the Barbecue Industry Assn., a trade group based in Arlington, Va.

At the same time, gas grills are gradually displacing the old-fashioned charcoal variety. Unit sales of gas models have risen about 11% over the past five years, during which time charcoal-grill ownership has declined by nearly 8%, according to SunTrust's Smith. The competition for grill sales is fierce, pitting Blue Rhino against brands such as Char-Broil, Kenmore, Thermos, and Weber. However, Prim hopes to sell a disproportionate share of the grill-buying public on the idea of exchanging tanks instead of refilling them -- and to do so he plans to add about 2,000 new retail outlets a year.

Blue Rhino -- a name inspired by the color of burning gas and Prim's memories of a safari vacation -- is also counting on the new safety guidelines to win converts. In April, the National Fire Protection Assn., a nongovernment group based in Massachusetts, proposed codes aimed at preventing the overfilling of propane cylinders, which can create a fire hazard. New tanks must now be equipped with a relief valve, while older tanks need to be retrofitted at a cost of between $20 and $25.

LURE OF CONVENIENCE. With some 40 million gas-griller tanks in need of upgrade or replacement, Prim sees plenty of work, which he says will boost the company's earnings growth in fiscal 2003. SunTrust's Smith sees net earnings per share rising 56% in 2003 and 27% in 2004.

In theory, Blue Rhino's propane sales could suffer if the economy weakens and grillers return to refilling stations rather than forking out that extra $10 for an exchange. But the lure of convenience is so strong -- and the extra cost of a Blue Rhino tank small enough -- that analysts don't expect to see that to happen.

Another long-term threat could be market saturation. Currently, Americans burn through 8 billion gallons of propane a year for cooking and other recreational uses -- about two, 20-pound tanks a year per grill. Unless backyard cooks decide to flip a lot more burgers, at some point Blue Rhino's unit sales could flatten.

COLD COMFORT. Prim sees that as a distant problem, however, since he predicts that upcoming UniFlame products for use during the winter months -- patio heaters, for instance -- will expand the cylinder-exchange market. He's counting on a 90% increase over the next 10 years. Furthermore, he expects price increases over that period to boost margins.

Nor do all observers see a limit to how much barbecue Americans can eat. Backyard cooking could heat up even more, predicts George Hirsch, a TV chef whose weekly outdoor-cooking show, Living It Up!, reaches more than 90 million households. "One of the biggest outdoor trends is designing the patio like the inside of the home," Hirsch says, "complete with grills and refrigerators and all the furnishings."

The country's obsession with flame-broiled burgers even has a cultural icon -- Hank Hill, the lead character in Fox TV's King of the Hill. A propane vendor and barbecue lover, Hank often waxes philosophic to his wife and son about all things gas-fueled and grilled. No doubt Hank would approve of Prim, who has persuaded barbecue bon vivants to pay extra for the propane that fuels their patio passion. By Suzanne Robitaille in New York


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