Category Archives: Company Analysis

Domtar (UFS)

paper

Key Statistics

Enterprise Value = $3.014 billion

Operating Income = $454 million

EV/Operating Income = 6.63x

Earnings Yield = 13%

Price/Revenue = .4x

Debt/Equity = 37%

The Company

Domtar is a paper company. They sell paper products, like copy paper. They also sell personal care paper-based products, like diapers and toilet paper. They are the largest manufacturer of freesheet paper in North America, operating 10 paper mills that produce 3 million tons of uncoated freesheet paper per year. 77% of their production is in the US and the rest occurs in Canada. They also produce 1.8 million tons of pulp per year, with production also divided between the US and Canada. Pulp is derived from separating fiber from wood, which is a raw material used to make a variety of paper products.

The 52-week high for Domtar is $53.89 and a return to these levels would represent a 54% increase in the stock price. The stock is under pressure for the typical small cap value reason this year: trade jitters. Domtar has most of their production operation in the United States and they sell overseas. 58% of their pulp revenue, for instance, is derived from foreign markets. This makes them sensitive to the worries about trade, tariffs, and Trump tweets. The strong US dollar has not helped the stock, either.

At current levels, it is cheap by every measure. EV/EBIT is 6.63x, price/sales is .4x, it is below book value, it is only at 108% of tangible book value, and it is trading at 3.8x cash flow.

My Take

I like boring stocks, and it doesn’t get much more boring than copy paper, tissues, and toilet paper.

This is a stable, mature, company that is not growing significantly, which is why the stock boasts a high dividend yield. For the last 10 years, revenue has floated around $5 billion to $5.8 billion. It has consistently made money for each of the last 10 years, with the exception of 2017, a year in which they lost $4.11 per share. Even though they lost money that year, it was not tied to the actual performance of the business. This loss was related to the change in the tax law that year and was a one time expense. This year, the trade war hasn’t significantly impacted the actual revenues, earnings, and cash flows of the company. The movement in the stock looks to me like an overreaction to the scary headlines.

At some point, this trade war is going to be resolved. My expectation is that once that happens, regardless of the actual outcome, stocks like Domtar will rally just because it’s over with. The market just needs a resolution. It doesn’t even have to be a good resolution. This might seem endless, but at some point, this will go away one way or another.

Domtar’s core, boring, business is not going anywhere or changing any time soon. Diaper use isn’t going to decline because of a trade war tweet. Diapers can’t be disrupted by some money losing startup backed by venture capital cash. In fact, adult diapers are likely a growth industry considering the fact that the senior population globally will continue to expand as life expectancy increases. Copy paper isn’t going anywhere, either. People have been talking about paperless offices (Captain Picard only used his iPad with the LCARS O/S) since I was a kid and paper doesn’t seem to go away. The persistence of the paper market is reflected in Domtar’s stability in earnings and cash flow.

Meanwhile, while I wait for the stock to snap back to a normal multiples, I will be paid a nice 5.22% dividend yield. Domtar’s strong free cash flow also suggests that this dividend can be sustained.

Like everyone else, I am worried about the probability of recession, so I considered Domtar’s performance during the last crisis before I purchased the stock. Domtar continued to earn money during the last recession, making a profit of $3.59 per share in 2009. The stock reacted more violently than the actual business to the recession, falling from $100 per share to $30. I don’t think this will happen again if we face another recession because Domtar is much cheaper today than it was back in 2007. Going into the last recession, Domtar traded at a much higher valuation. In 2007, it traded at 1.5x book value and today it trades at .84x book. Going into that crisis, Domtar was also much more leveraged with a debt/equity ratio that was over 100%. Today, debt/equity is only 37%.

Domtar has a high degree of financial quality. The Altman Z-Score of 2.34 implies that the company is not in distress. The Piotroski F-Score of 7 also exhibits a high degree of financial strength. The debt/equity ratio of 37% is also at a low and safe level. The Beneish M-Score of -2.68 implies that the company is not an earnings manipulator.

Domtar trades at a discount to its competitors and its history. The current P/E of 7.74 compares to a 5-year average of of 14 for the stock, which seems right for a mature company that isn’t expected to change much and pays a high dividend yield. An increase to this level would be an increase of 80% in the stock price. The average P/E for the industry is 16.45. The current EV/EBIT multiple of 6.63 compares to a 5-year average of 14.16 for the stock. On a price/sales basis, the current .40x level compares to an industry average of .63x and a 5-year average for Domtar of .50x.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Insight Enterprises (NSIT)

8675309

Key Statistics

Enterprise Value = $2.135 billion

Operating Income = $243 million

EV/Operating Income = 8.78x

Earnings Yield = 9%

Price/Revenue = .27x

Debt/Equity = 45%

The Company

Insight Enterprises is an Arizona-based tech company founded in 1988. They operate globally, but their focus is on North America, where 76% of their sales originate. They provide tech solutions to business clients that run the gamut: supply chain optimization, connecting workforces, cloud and data centers, and the vague “digital innovation.”

Insight provides tech solutions for businesses, so they don’t have to do all of the work themselves. A company can pay Insight Enterprises, and procure their hardware, software, set up a secure cloud, set up remote work for their employees to collaborate, etc. If you’re running a large, complex, organization – it can be extremely costly to figure out how to complete all of this from scratch. It’s far more efficient to hire an expert like Insight to do it all for you.

Supply chain optimization is a service they offer to businesses to deploy hardware and software for the client. The procure and configure hardware and software for companies. Connected workforce translates to helping companies operate on the cloud, encourage employees to work on multiple platforms. Insight also provides security for these solutions. Businesses come to Insight with tech problems, and Insight offers solutions. For their cloud solutions, they provide robust security services and infrastructure management.

Digital innovation is a custom tech consulting service. Clients can go to Insight with a unique problem and see if Insight can develop a tech solution. For example, Insight can help if you’re running a hospital and need a system to predict how many nurses you need on staff in different specializations and at different times of the day. They’ve helped railroads use drones to inspect trains faster and with less staffing. Additionally, they have developed automated drilling platforms for oil & gas companies. They’re a creative and innovative firm that can deliver real value to their clients, providing solutions that they likely wouldn’t be able to develop on their own.

To stay on the cutting edge, Insight acquires smaller firms that offer value to their clients. Insight has grown immensely through acquisitions. A few recent acquisitions include Cardinal Solutions in 2018, Datalink in 2017, Blue Metal architects in 2015. Recently, they announced their intention to buy PCM for $35 a share, or $581 million. PCM generates over $2 billion of sales, so it doesn’t look insane.

The stock suffered over the summer due to its place in the small-cap value universe and a slightly disappointing earnings report which showed some temporary rising costs related to the Cardinal acquisition.

My Take

Insight is a fast-growing company in a hot industry with a strong financial position that trades for very cheap multiples.

Their 10k is replete with buzzwords that usually make roll my eyes: Big data! Software as a Service! Internet of things! Cloud computing! Artificial intelligence!

Insight is at the cutting edge, and the company is a departure from my typically un-cool focus on dull and trashy industries. Don’t worry. I haven’t sold out: selling for 27% of sales and 9x cash flow, this is in the bargain bin of the stock market, despite Insight’s position in a fast-growing hot industry.

Insight Enterprises has a long and profitable history. The company has been consistently profitable over a long period. Insight even recorded positive earnings in 2009, in the depths of the global financial crisis.

Meanwhile, they have been able to grow sales and earnings throughout the economic expansion. EPS increased from 67 cents per share in 2009 to $4.55 in 2018. Sales growth has been similarly strong, growing from $4.1 billion in 2009 to $7.08 billion today.

Insight has a higher degree of financial quality with a Piotroski F-Score of 6, an Altman Z-Score of 3.48 (low bankruptcy risk), and a Beneish M-Score of -2.14 (not a probable earnings manipulator). The debt/equity ratio is current 45%, which is also at a safe level. The share count is down over the last year, so they are not diluting shareholders.

Insight trades at a discount to its competitors and its history. On a price/earnings basis, the current P/E of 11 compares to a 5-year average of 14.4. The average for the industry is 22. On a price/sales basis, the current level of .27x compares to an industry average of 1.45x.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Bank OZK

summer

Key Statistics

Price/Book = .91x

Earnings Yield = 11%

Dividend Yield = 3.4%

Debt/Equity = 12%

The Company

Bank OZK (formerly Bank of the Ozarks) is a regional bank headquartered in Little Rock, Arkansas with a substantial presence in the southern United States. The bank has grown significantly over the last 25 years, growing from 4 locations in 1994 to 251 today. Their business is focused mostly on real estate.

Growth has been both organic and through the acquisitions of smaller banks. Some of the banks acquired in the last five years include: First National Bank of Shelby (North Carolina), Bancshares Inc. (Houston), Arkadelphia (Arkansas), Intervest Bancshares Group (Florida). The bank is growing aggressively through acquisitions, but is largely maintaining their southern presence. I think this is a smart move, as this includes some of the fastest growing states in the country.

My Take

I discovered Bank OZK when I was looking for regional banks below book value that were well capitalized with easy to understand businesses (as opposed to the massive, global, banks – which I don’t even think the CEO’s completely comprehend).

Right now, the major macro worry about banks is that we might be on the brink of another recession. Everyone remembers how banks fared in the last recession, so investors are proceeding with massive amounts of caution. OZK has a concentration in real estate loans, and memories are also fresh of that debacle. OZK suffered a peak to trough decline of over 50% during the last crisis.

While Bank OZK suffered a significant stock decline during the financial crisis, the actual business weathered it well. In 2009 during the depths of the recession, OZK earned a profit of 55 cents per share. This was during a time when most banks were suffering massive losses. Meanwhile, the company is much better capitalized than it was going into the last recession. Debt/equity was over 250% going into the last recession and it is only 12% today.

Meanwhile, the stock is priced like a recession has already taken place. In 2009, in the depths of the financial crisis, Bank OZK traded at book value. Prior to the crisis, it peaked at nearly 4x book value. Now, the stock is below book value trading at 91%. We aren’t in a recession and this bank is profitable, but the market is treating this stock like we’re already in one.

This is also a company that is undergoing significant growth. Revenues are up 462% since 2009. Dividends are up 515%. Earnings are up 489%. Return on equity is also at a respectable level of 10.89%. Meanwhile, the bank doesn’t appear to be obtaining these results with higher amounts of risk taking, with a very low debt/equity ratio. I don’t see why they won’t be able to continue growing into the future and maintain their current returns on equity. The bank also sports a nice dividend yield of 3.4%.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Weyco Group (WEYS)

shoes

Key Statistics

Enterprise Value = $268.28 million

Operating Income = $27.04 million

EV/Operating Income = 9.92

Earnings Yield = 8%

Price/Revenue = .85x

Debt/Equity = 5%

The Company

Weyco is a footwear company. Weyco has several excellent brands, which include: Florsheim, Stacy Adams, Nunn Bush, and Bogs. Most of the footwear brands are reasonably priced dress shoes for men. Bogs specializes in boots. Their boots are known for being waterproof and sturdy.

The business is split up into two segments: wholesale and retail. It wholesales to stores throughout the United States and Canada. Each brand also has a web presence and sells shoes directly to consumers via the web from its site. Additionally, you can purchase their shoes directly on Amazon. Nearly all of their shoes are available for prime shipping, and some are including in Prime Wardrobe.

Most of these brands have a long history, which indicates they’re probably not likely to fall apart any time soon. Florsheim’s is a particularly iconic dress shoe brand and has been around since 1892. The CEO is currently Thomas Florsheim.

My Take

Weyco’s shoes receive positive reviews online. The Florsheim Oxford dress shoe, for instance, looks good and is reasonably priced at $103. One of the Bogs children’s boots, the “bogs kids classic high waterproof insulated rubber rain and winter snow boot” is a #1 best seller in boy’s snow boots on Amazon. This boot, along with many others, is included in prime wardrobe. It receives rave reviews with plenty of 5-star ratings.

While Weyco maintains nine retail stores, they’re not threatened by the retail carnage, as their products already have a prominent place on Amazon and it is sold through their own website.

While the company isn’t growing significantly, it is consistently profitable. They posted positive results in the depths of the recession in 2009. FY 2018 was one of their best on record when they earned $1.97 a share. Their recent quarter hasn’t been bad either, in which they earned 40 cents a share compared to 29 cents in the previous quarter a year ago.

They have a high degree of financial quality. Weyco’s debt/equity ratio is an ultra-conservative 5%, compared to an industry average of 98%. With little debt and continued profitability, Weyco should weather a recession well. They also have an Altman Z-Score of 4.63, which is a low bankruptcy risk. The Beneish M-Score is -2.76, meaning there is a low probability of earnings manipulation. Piotroski F-Score is a solid 6 out of 9.

If the company is so great, why is the stock down? The stock is down due to the usual suspects: recession jitters and tariffs. An increase to the 52-week high would be a 55% increase from current levels.

Weyco is affected by the tariff because they source many of their shoes from outside suppliers which are located in India (which isn’t a problem) and China. The tariffs will force Weyco to raise prices, which is challenging to pull off without affecting demand. It’s also possible that they won’t be able to pass on the cost and will have to eat the cost to maintain market share. Long story short, tariffs are the main reason that the stock is now available at a bargain price.

As with everything else I’ve bought that is affected by the tariffs this year, I’m purchasing the stock based on this uncertainty with the understanding that this is why I can buy at a bargain price. I believe that the worst case scenario has already been priced into the stock. Once the uncertainty subsides (and it will subside, one way or another), the stock can appreciate back up to a reasonable level.

In terms of the multiples, this trades at a P/E of 12.39. This compares to an industry average of 22. The P/E compares to Weyco’s five year average of 17.5, which seems right for a company that is consistently profitable with minimal debt. An increase in the P/E to 17.5 at current earnings would be a 41% increase from current levels. The EV/EBIT multiple of 9.9 compares to an average of 11.29, and Weyco’s valuation often goes as high as 13x. Weyco also supplies an excellent dividend yield of 3.72%. For over a decade, dividends have been consistent.

On a price/book and price/sales basis, it looks to me like a recession is already priced in. Price/sales is currently .85x, which is the lowest it has traded at in the last ten years, including the recession. The same is true on a price/book basis, currently at 1.25x, which is the cheapest it has traded at in the last decade.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Werner Enterprises (WERN)

trucking

Key Statistics

Enterprise Value = $2.16 billion

Operating Income = $220.44 million

EV/Operating Income = 9.79x

Earnings Yield = 8%

Price/Revenue = .85x

Debt/Equity = 10%

The Company

Werner Enterprises is a trucking and logistics company headquartered in Omaha. The company was founded in 1956 by C.L. Werner, who was also a trucker. Over the decades, the company has expanded into one of the biggest trucking companies in the country, posting $2.4 billion in sales in 2018 and operating over 7,000 trucks.

The stock has been on a steady upward trajectory for a long time, as the trucking freight gradually expands with the American economy.

Side note: There is a close relationship between truck tonnage and the performance of the Russell 3,000. It’s not a leading indicator, but truck tonnage gives you a real time pulse on the American economy.

trucksrussell3k.JPG

My Take

Because trucking relates closely to the performance of the economy, markets have been conditioned to look at this as a cyclical industry subject to the volatility of fuel prices. Another element adding to the cyclicality of this business is shortages of truckers, which inflates wages and pushes up operating costs. It also creates challenges with retention because a big wage spike fuels job hopping.

The cyclicality is a concern, but not as much as it has been in the past. Companies like Werner have been diversifying their business into logistics services, rather than being purely a freight company.

Werner takes steps to reduce the cyclicality of the business. They have fuel surcharge programs with their customers. This practice lets them pass on most of the cost of a fuel increase to the customer, so they don’t have to eat those costs when fuel is volatile.

The logistics business represents 25% of revenue. This logistics segment helps reduce the volatility of earnings due to the cyclicality of the trucking segment. The logistics segment helps Werner connect their customers to shipping and freight services all of the world to accomplish their needs. They help their customers create a global supply chain, which is necessary regardless of what the macro economy is doing.

The extended operating performance of the company is excellent. They remained profitable throughout the financial crisis. Since then, their return on equity has remained in a healthy range of 9-15%. The consistency of the business is one of my main attractions to it.

The stock has declined recently due mainly to concerns about a recession and the trade war having an impact on freight. It is currently 25% off of its 52-week high. There is also anxiety because Amazon is threatening the freight business with its launch of Freight Waves, which will dig into the profitability of the freight industry. There are also concerns that the trade war will decrease trade volumes with Canada and Mexico, something else that is weighing on the stock.

Werner has a high degree of financial quality. The debt/equity ratio is only 10%, compared to an industry average of nearly 100%. They have an Altman Z-Score of 4.03, which means that the probability of bankruptcy is low. The Beneish M-Score is -2.7, which means the likelihood of earnings manipulation is low.

Werner trades at a discount to its average valuation. It currently has a P/E of 12, which compares to a 5-year average P/E of 18.8. An increase to this level would be a 56% increase in the stock price. A boost to the 52-week high would be a 43% increase. On an Enterprise Value/EBIT basis, they trade at 9.7. The 5-year average is 13.75. In 2017, they traded as high as 20x.

On a price/sales basis, they currently trade at .85x. This valuation isn’t quite at the depths that the stock traded at during the Great Recession, but it’s slightly below the levels it traded at in 2010, a time in which the US economy and freight industry were in a much weaker position. The current valuation implies that a bulk of the market’s worries are already priced in. It also eases my mind that the company weathered the last recession well and maintained profitability.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Twin Disc (TWIN)

boats

Key Statistics

Enterprise Value = $227.52 million

Operating Income = $32.64 million

EV/Operating Income = 6.97x

Price/Revenue = .59x

Earnings Yield = 10%

Debt/Equity = 34%

The Company

Twin Disc is a manufacturing firm established in 1918. They have a diversified manufacturing business. A bulk of the business is related to the manufacture of transmissions for boats and heavy duty equipment. In addition to marine transmissions, they make propulsion systems, steering, gearboxes for boats. Basically, they specialize in all mechanical aspects of marine propulsion.

They also make transmissions and propulsion systems for heavy duty off-highway land vehicles. This equipment is used heavily in the oil & gas industry, as well.

The firm sells equipment throughout the world and in multiple markets. The marine business that focuses on boating hobbyists is very cyclical. Like RV’s, boats are a discretionary expense and it is an expense that will be cut when entering a recession. I believe the saying is that “a boat is a hole in the water that you pour money into.”

My Take

Fortunately, the pleasurecraft boating hobbyist segment of the business doesn’t represent the full business. They also manufacture the transmission and propulsion systems in police patrol boats, for instance. Thier products are also used in heavy machinery. A significant customer is Caterpillar, for example.

Twin Disc’s products are also used by natural resources companies, like frackers. The fracking side fueled a boom in the stock in the first half of the decade, which fueled a massive ascent in the stock price. The stock then collapsed with oil prices in 2015-16.

The stock has been punished in the last year over recession worries around the leisure boating segment. A return to the 52-week high would be a 100% increase from current levels. Steel is a major component of its products, and the market is concerned about steel prices, which is also weighing on the stock.

Oil has also struggled since the 2015-16 bust and hasn’t really recovered. The expectation is that a global recession will further reduce the price of oil by reducing demand. Oil stocks as a whole remain depressed, and Twin Disc has been affected by these worries due to its exposure to the fracking industry.

Twin Disc is also globally diversified, with 46% of sales occurring internationally. Much of the economic slowdown of late has been overseas. This slowdown, combined with anxiety about the trade war, also weigh on the stock.

Let’s recap: the market hates Twin Disc because oil is in a slump, everyone is worried about a recession, it is exposed globally, it is impacted by steel prices, and is a cyclical company.

Meanwhile, Twin Disc’s business is performing well. Sales in 2018 were $241 million compared to $168 million in 2017.

Mr. Market appears to be anxious and the company itself is still doing fine.

The market has overreacted to the company’s woes. I’m sure that at least one of the things Mr. Market is fretting over will be resolved. I think it’s unlikely that oil will remain depressed forever, for example.

As for the more cyclical elements of the business, the market has already priced in a recession for this company. It now trades below book value. The last time it was this cheap in 2009 during the Great Recession and during the depths of the oil price crash. Whenever this company trades around book value, it is an opportune time to buy.

From a valuation multiple standpoint, it currently trades at a P/E of 9.8 compared to an industry average of 19. It trades below book, and the 5-year average is 1.5x book. The current price/sales ratio also matches cyclical nadirs in the stock price. It currently trades at .59x. compared to a 5 year average of .97x. The EV/EBIT ratio of 6.97x also compares favorably to the company’s history.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Preformed Line Products Company (PLPC)

power

Key Statistics

Enterprise Value = $268.74 million

Operating Income = $29.68 million

EV/Operating Income = 9.05x

Price/Revenue = .6x

Earnings Yield = 9%

Debt/Equity = 25%

The Company

Preformed was founded in 1947 by Thomas F. Peterson, who held several patents for “armor rods,” which protect electrical conductors in overhead power lines. The product was a success, and the company grew significantly. Over the years, the company expanded into several other products involved in cable and power transmission, including fiber optics.

Demand comes from the construction of new power lines, power equipment, telecommunications infrastructure, data communication. Their products can be used to repair and revitalize aging power infrastructure. Their products can also prevent the loss of energy in a power line, helping save the end customers money.

The business is divided up into three main areas:

  • Energy products – 69% of the company’s revenue. This is the core of the company’s business and ties back into the company’s heritage of armor rods. They are referred to mainly as “formed wire products.”
  • Communications products – 21% of the company’s revenue. Preformed’s products protect communication lines (like copper cables and fiber optics) from environmental hazards.
  • Special industries products – 10% of the company’s revenue, mainly involving data hardware

My Take

Preformed’s customers are mainly electric utilities, cable operators, and renewable energy companies.

I think it’s possible that we’re headed for a recession, so I like that this company’s business, while cyclical, should still do alright even if we face a recession. Power grids need maintenance, cable networks need maintanence, and it’s not something that is simple discretionary spending that will be slashed in a recession. The resiliency of the business is evident in the company’s history of results. Even in the depths of the recession, in 2009, the company still made $4.35 per share.

PLPC also has the opportunity to benefit from global economic growth. Products are sold around the world. As the global economy grows, demand for electricity and telecommunications services will grow. This increases demand for PLPC products. Meanwhile, in the United States, the electrical and telecommunications grid will require constant maintenance and spending, creating a steady demand for Preformed’s products. If Trump and the Democrats can cut an infrastructure deal (I know, but stranger things have happened), that would also benefit Preformed.

The balance sheet is in a strong position. Against the current price of $51.17, $9.05 in cash. The debt/equity ratio is 18%. With an Altman Z-Score of 3.9, bankruptcy risk is very low.

Meanwhile, Preformed’s current price is compelling. The P/E is 11, and the 5-year average is 21. The EV/EBIT multiple is 9, and PLPC typically trades around 13. An increase to this level would be a 44% increase from current levels. The stock currently trades for 60% of sales, which is where it was in the depths of early 2009 market collapse. Preformed also trades near book value, which has marked similar nadirs in the stock price.

Overall, I think Preformed is currently a business that should stay resilient in a recession with strong growth prospects. At a compelling price relative to its history, I think it is a good addition to my portfolio.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Schnitzer Steel (SCHN)

metal

Key Statistics

Enterprise Value = $749.09 million

Operating Income = $127.88 million

EV/Operating Income = 5.85x

Price/Revenue = .26x

Earnings Yield = 20%

Debt/Equity = 23%

The Company

Schnitzer Steel was established in 1906 as a scrap metal business by Sam Schnitzer. It has expanded to become one of the biggest recyclers of scrap metal in North America. Schnitzer acquires scrap metal via scrap cars, rail cars, appliances. Scrap metal is the raw input into electric arc furnaces. They currently operate 23 scrap metal facilities in the United States.

Schnitzer also produces finished steel products such as rebar, wire rod, coiled rebar, merchant bar, and other specialty products.

My Take

The steel industry has been under pressure all year. With increasing steel tariffs, customers globally were in a rush early in 2018 to acquire steel in anticipation of the tariffs. Prices rose, benefitting the steel industry, and their subsequent decline has seriously hurt the industry. Making matters worse, recession jitters entered the picture, further hammering all of these stocks and sending them all into deep value territory. The market, in turn, has overreacted to what looks like a slight decline in steel prices.

steel

Schnitzer, in particular, is affected by the steel tariffs in the US and abroad because their revenue is global. North America sales represent 39% of their business, and the rest is sold throughout the globe.

I don’t talk about price-to-book much, but I think it’s worth discussing for an extremely cyclical stock like Schnitzer.  Schnitzer currently trades at 93% of book value. This is the same valuation that the company previously had in the depths of 2009. It was around the same valuation at the trough of steel prices in 2016. This looks to me like an overreaction and a mispriced security.

Schnitzer trades at a discount to its peers and its history. At 26% of sales and .93x book value, the company currently trades near the trough of steel prices, which occurred in 2016. This seems like a significant overreaction to a slight recent decline in prices since mid-2018. The current P/E is 5, and the forward P/E is 13. As recently as 2017, the P/E was 20.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

ArcBest (ARCB)

truck

Key Statistics

Enterprise Value = $746.83 million

Operating Income = $142.67 million

EV/Operating Income = 5.23x

Price/Revenue = .22x

Earnings Yield = 9%

Debt/Equity = 42%

The Company

ArcBest is a logistics company that is split up into two segments: asset heavy (mainly shipping freight, and this is 69% of revenue) and asset-light (31% of revenue). The asset heavy segment is a trucking freight company, with a specialty in less-than-truckload (LTL) shipping. LTL is exactly as it sounds: it’s for shipping freights that aren’t big enough to comprise a full truckload. The light asset division provides logistics services.

The LTL business usually picks up goods at an individual company that isn’t large enough to fill an entire truck. Small shipments are then consolidated at a service center. From the service center, they’re then delivered with smaller vehicles from the service center to the end customer. Pulling this off requires infrastructure and heavy staffing. This creates a low margin capital intensive business, but it also creates significant barriers to entry. ABF Freight, ArcBest’s asset-based carrier, operates 245 service centers throughout the United States. This is a large enterprise that is difficult to duplicate.

The asset-heavy line of the business is also labor intensive. Truckers are expensive, and there is currently a shortage of them. Labor costs represent 51.9% of revenues.

My Take

ArcBest operates in a tough business but maintains decent cash flow generation and a stable financial position, with a debt/equity ratio of 42%, compared to 99% for the industry.

The stock is down 47% over the last 52 weeks, and it is due to the usual suspects. The market is worried about a recession, and that would significantly reduce freight throughout the US. The trade war and tariff worries are also weighing the stock down.

LTL is a brutal business, but it is a growing one. I think it is likely to grow more as e-commerce and total freight expands throughout the United States. Customers are ordering large goods online. As people order things like couches online, the demand for LTL services will grow. Trucking is also something that grows organically with the economy, as you can see from the below truck tonnage data from FRED.

trucktonnage

Meanwhile, ArcBest’s asset-light businesses (Fleet Net, Panther Logistics, ABF Logistics) are good businesses and are growing significantly. In 2013, these divisions produced $571 million in revenue. This has grown to $971 million in 2018. These businesses use technological solutions to help their clients navigate complex supply chains.

ArcBest has a high degree of financial quality. The debt/equity ratio is only 42%. The Altman Z-Score is 3.34, implying a low probability of bankruptcy and a permanent loss of capital. The F-Score is a solid 6. ArcBest also maintains a large cash stockpile, currently at $9.60 share, representing 37% of the current market capitalization. I suspect ArcBest keeps such a significant cash position because they contribute to a multiemployer pension plan for current and former employees. This can result in payments outside of expectations, which is why ArcBest likely stays on the safe side and maintains a significant amount of cash.

The current P/E of 11 compares to an industry average of 16. On a price/sales basis, Arcbest currently trades at 22% of revenue, compared to an industry average of 99%. The stock currently trades at 4x cash flow. The EV/EBIT multiple is currently 5.23x, compared to a 5-year average of 14.57. As recently as 2018, the company traded at 10x EV/EBIT, which seems right for a company of this kind.

ArcBest certainly faces some uncertainty, but I think it is currently mispriced by the market and it is in a strong financial position which makes up for the tough business it is engaged in. They are also growing their asset-light division, which ought to improve returns on capital over the long run.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Miller Industries (MLR)

tow

Key Statistics

Enterprise Value = $326.36 million

Operating Income = $47.34 million

EV/Operating Income = 6.89x

Price/Revenue = .42x

Earnings Yield = 11%

Debt/Equity = 14%

The Company

Miller Industries manufacturers towing and recovery equipment. They maintain multiple brands operating in three segments: (1) Wreckers – These are used to tow cars and trucks from car accidents. They make a variety of wreckers, including one-off tow trucks and more heavy-duty equipment. (2) Car carriers – These are flatbed vehicles with hydraulic tilts (an example is pictured in the stock photo). (3) Transport trailers – These are the vehicles you typically see on the highway stacked up with cars usually transporting new cars to an auto dealership.

Miller has a nice little niche with well-known brands in the industry, such as their Century line. The company as it exists today, is a result of a significant amount of consolidation over the years, as they’ve acquired multiple brands under the Miller umbrella.

Miller grows with the economy. As the economy improves, the miles which are driven in the US and internationally also grows. As driving mileage grows, so do car accidents. Miller’s success with wreckers, for instance, is tied to increasing numbers of car accidents that come naturally through more driving and more activity. In 2007, for example, there were 6,024,000 car accidents in the United States. This then declined with the recession to 5,338,000 in 2011. By 2016, the number of car accidents increased to 7,277,000.

miller

My Take

Obviously, this a cyclical industry. Miles driven is extremely cyclical. Miller also has international operations that can be affected by Trump’s trade wars. The stock is down significantly since Trump started escalating the trade war and is down 22% from its 52-week high, which was only reached back in May. This has been hammered by the usual subjects: trade war and recession jitters.

If we do have a recession, one advantage that Miller has is that most of its products are manufactured upon order. In other words, expenses can quickly be reduced if the economy dries up. This leads to the remarkable consistency in Miller’s margins. Their net margins, for instance, are typically around 4-6% regardless of the direction of revenue. In 2009, during the depths of the recession, Miller was still able to eke out a profit of $.51 per share, a year in which most firms produced losses. The stock price did collapse in the last recession, but it also traded at a much higher valuation at the peak of the last cycle. In 2007, it traded at 5x book value (it currently trades at 1.3x book).

While the market is speculating that a recession and trade war will adversely affect Miller, the company itself continues to execute. In the most recent quarter, for instance, income was up 29% over the same quarter a year ago.

Miller has a high degree of financial quality. Debt/equity is low, at 14%. The F-Score is 6, which is pretty solid. The Altman Z-Score of 4.16  implies a very low probability of bankruptcy and a permanent loss of capital.

If Miller simply continues to do what they’re doing and the market speculation about trade wars and recession subside, the multiple ought to increase significantly. Right now, from an EV/EBIT perspective, the company trades at 6.8x. The 5-year average is 8.6x, which would be a 26% increase from current levels. The P/E of 8.74 compares to an industry average of 20.94 and a 5-year average for Miller of 14.7. Miller currently trades at 42% of sales, which compares to an industry average of 129%. Quite recently, Miller traded at 55% of sales.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.