Hillenbrand (HI): A Contrarian Gem After Russell Exit?

As Hillenbrand, Inc. (NYSE: HI) prepares to exit the Russell 2000 index on June 21, 2025, investors are left to wonder: Is the market underpricing this industrial giant's strategic realignment and undervalued potential? With a stock price hovering around $20—a 34% discount to recent DCF estimates—the case for HI as a contrarian buy is compelling. Let's dissect the numbers.

The Russell Exit: A Catalyst or Headwind?

Hillenbrand's removal from the Russell 2000—effective June 21—could trigger short-term selling as index funds rebalance portfolios. Yet this exit is far from a death knell. In fact, it underscores HI's deliberate shift away from small-cap volatility toward a leaner, higher-margin business model.

The Russell 2000's recent struggles—down 20% from its November 2024 peak due to tariff-driven headwinds—make HI's strategic pivot timely. By exiting the index, HI escapes the indiscriminate selling that often accompanies reconstitution, while positioning itself to focus on its core strengths.

Strategic Reallocation: Divesting for Strength

The company's recent moves to jettison cyclical businesses have been masterstrokes. In March 2025, HI sold a 51% stake in Milacron for $265 million, slashing net debt to $1.46 billion. A second deal—selling TerraSource Global to Astec for $245 million (expected to close by year-end)—will further reduce leverage, improving its net debt-to-EBITDA ratio by 0.2x.

These moves free HI to focus on its Advanced Process Solutions (APS) segment, which boasts double-digit backlog growth and a 43% gross margin—far outpacing the 14% organic growth in its Molding Technology Solutions (MTS) business. The company's emphasis on “less cyclical, higher-margin” operations is no accident; it's a direct response to macroeconomic headwinds like tariffs and rising rates.

Valuation: A 20% Discount to Fair Value?

DCF models paint a bullish picture. Simply Wall St estimates HI's fair value at $25.34—20% above its June 20 price of $20.23—while Alpha Spread's May 2025 analysis suggests an even higher $30.95 per share. Both models factor in HI's post-divestiture cash flow stability and streamlined operations.

Meanwhile, Hillenbrand's Price-to-Sales (P/S) ratio of 0.5x is half the machinery industry average of 1.8x. This stark undervaluation relative to peers hints at a market failing to appreciate HI's structural improvements.

Risks on the Radar

The skeptics have valid points. HI's negative EPS and $1.46 billion debt load raise concerns. The company also faces near-term revenue declines, with full-year EPS guidance cut to $2.10–$2.45 due to tariffs. Yet HI's $770 million liquidity buffer—$458 million in cash alone—provides a safety net.

The dividend, though reduced to a 1.2% yield, remains sustainable, and the TerraSource sale's $100 million in proceeds will further de-risk the balance sheet.

The Contrarian Play

Hillenbrand is a classic “value trap” candidate—if the traps are disarmed. The dividend cuts and debt are real, but the strategic moves are laser-focused on survival and growth. With tariffs and interest rates likely peaking, HI's leaner portfolio could outperform in 2026.

Investors willing to look past short-term macro noise will find a company trading at 80% of its DCF value, with a runway to profitability in its core APS business. This is a stock to buy on dips, with a $25–$30 price target anchored in its fundamentals—not its Russell 2000 past.

Action: Buy HI on any post-reconstitution dip below $20. Target price: $28–$32 by year-end . Risk: $17 stop-loss if debt concerns resurface.

The Russell exit isn't Hillenbrand's end—it's a reset. For contrarians, it's a chance to buy a retooled industrial powerhouse at a 20% discount to its potential.