|Shares Out. (in M):||8||P/E||18||0|
|Market Cap (in $M):||1,900||P/FCF||12||0|
|Net Debt (in $M):||-400||EBIT||150||0|
Sometimes you just get lucky. My second idea is due today in order to maintain my VIC membership. I have had a lot of good ideas in the energy space over the last six months but I was very busy and now they have run up so much I don’t feel right about posting them. I needed something else in a hurry. Lo and behold, I opened the mail earlier this week and Ash Grove Cement’s 2015 financial statements had arrived. Those of you who read my writeup in 2012 (please refer to it for background if you’re interested) may recall that the company is not an SEC registrant, so only shareholders that hold their shares directly with the company receive their financial statements. I sold most of my position in late 2014 but I kept a couple of shares in certificate form for this purpose.
What I discovered when I read their statements for 2015 was the single cheapest stock I know of, and they have been performing better than I expected. This feels like the type of thing that used to happen in the 1970s or 1980s – you open the mail and hey, here’s a really cheap stock! Over 1/4 of the market cap is in cash and securities (>$50/sh), and it’s trading at less than 12x trailing earnings net of cash, less than 8x trailing FCF net of cash, and less than 6x trailing EBITDA – massive discounts to MLM and VMC which are trading at 14.7x and 18.7x trailing EBITDA. The discrepancy seems way too big to be justified on the basis of a liquidity discount, which should reasonably be about 30%.
Look, cement is a cyclical business and it’s been almost 7 years since the last bottom. Nobody wants to buy at the top. I get it. But they’re not making any more cement plants and this stock is just straight up cheap. With a fortress balance sheet like they have, I can’t see how they would ever need a bailout from Warren Buffett like Vulcan Materials got after taking on too much debt to buy Florida Rock at the peak of the last cycle. VMC has spent the last 8 years repairing its balance sheet and only now have they gotten their forward debt/EBITDA metric below 2x, thanks mainly to EBITDA growth. MLM pulled a similar move, taking on a chunk of debt to buy Texas Industries in 2014, and has also just now gotten their forward debt/EBITDA metric below 2x primarily because of EBITDA growth. If we have a recession and EBITDA shrinks, MLM and VMC’s credit metrics are going to expand again. Buyers of those stocks are paying big multiples and getting balance sheets that are not worry-free. Buyers of ASHG are paying a highly discounted multiple and getting one of the strongest balance sheets I am aware of.
What has changed since I closed out my original writeup in November 2014?
Ash Grove’s stock has only gone up 11.4% vs. a 30.6% increase in MLM and a 59.5% increase in VMC
Ash Grove posted better results than I expected. They earned >$13/sh last year and generated FCF of >$20/sh (their Midlothian plant modernization project has been completed). They generated a return on net tangible operating assets of nearly 10.0%, which is better than MLM’s ROIC of 5.4% and VMC’s ROIC of 5.5%.
They spent >$75 million on share repurchases in 2015 (nearly 5% of the market cap) – a highly sensible move given the excess cash and low valuation on the stock. More importantly, it signals they are not just going to let excess cash sit on the balance sheet forever. One of my historical concerns about this company has been that since it’s dark in terms of reporting, the valuation may remain depressed for a while. If you got paid a big dividend then at least you would be getting paid to wait for a re-rating that may never occur, but the actual dividend only equates to a 1.3% yield. I would prefer a bigger dividend to a buyback, but buying back stock at these prices makes sense and IF it continues it could eventually force the market to reckon with the highly discounted valuation.
Ash Grove hired an outside CFO and promoted the prior CFO to President/COO. Neither man is a member of the founding Sunderland family. The COO now signs the shareholder reports along with Charlie Sunderland (Chairman/CEO) and Kent Sunderland (Vice Chairman), possibly signaling that succession planning is under way. Ash Grove has always been run in a responsible manner; after all, the family owns a lot of stock, but I find that sometimes outsiders can come into a culture that has been in place for a long time and find efficiencies that couldn’t have been realized before.
Cement prices have broken out. After being range bound in the high 70s/low 80s per short ton, Martin Marietta’s ASPs (they bought Texas Industries in 2014) reached $102.44/ST in Q4’15, up 10.5% YoY. They are guiding to 2016 price realizations of $110-112/ST, +8.4% YoY. As cement consumption inches higher, it gets closer to the supply wall that exists because of how difficult it is to build new capacity in this country. U.S. cement shipments increased 3.8% in 2015 to 92 million MT. U.S. production capacity remains at 100 million MT, virtually unchanged from my original writeup on ASHG back in 2012. ASHG controls approximately 8% of that capacity.
The federal government passed a multi-year highway bill for the first time in years
What’s not to like? Several things:
We are seven years off the bottom in terms of this business expansion. A recession is bound to happen sooner rather than later. Again, I think that risk is offset to a degree by the low valuation and the net cash balance sheet.
Liquidity in this stock is very low. It only trades 50-100 shares per day on average ($11-22k/d). This is only suitable for your PA.
You have to hold shares directly with the company in order to receive the financial statements, and even then the statements are very high level. They don’t give you any of the granular operating data investors have come to expect from full registrants like MLM or VMC. It’s difficult to create a bottom up earnings model for ASHG. That said, I think these issues are somewhat mitigated by the massively net cash balance sheet and the owner/operator dynamic.
I'm not going to claim any catalysts. Watching this stock can be like watching paint dry.
|Subject||2016 Q2 results|
|Entry||08/22/2016 02:40 PM|
|Subject||Re: 2016 Q2 results|
|Entry||08/23/2016 09:07 AM|
hi snarfy, thanks for the continuous update on this name.
i know the stock is very cheap on trailing numbers. but any thoughts on what normalized EPS should be? where does current margin compare to prior peak/trough? and given how muted the cycle has been, is it reasonable to assume the cycle to be longer?
i know MLM/VMC have been super strong partially because there is a belief that we would see a massive infrastructure program after the general election. definitely not priced in ASHG, right?
|Subject||Re: Re: 2016 Q2 results|
|Entry||08/26/2016 10:00 AM|
You bet. I agree - a massive infrastructure program after the general election is not priced in at ASHG with the stock trading at 10x trailing P/E net of cash vs. MLM at 34x and VMC at 43x.
|Subject||Re: Re: Re: Update/Reality Check|
|Entry||01/19/2017 09:09 AM|
If you hold them in a brokerage account you won't receive anything.
If you hold shares directly with the company they will automatically mail you the report every quarter.
So, I have a certificate for just two shares that I hold directly (why not just one share? I forget) in order
|Subject||Re: Re: Re: Re: Re: Update/Reality Check|
|Entry||01/19/2017 05:09 PM|
Secret option number 3 is the pro move if you ask me.
|Subject||Snarfy - any update on ASHG?|
|Entry||05/08/2017 04:08 PM|
Any update to your view on this one?
|Subject||Re: Snarfy - any update on ASHG?|
|Entry||05/09/2017 10:05 AM|
No change. I recieved the Q1 update in the mail yesterday. Will post it shortly.
|Subject||Re: Re: Snarfy - any update on ASHG?|
|Entry||05/09/2017 06:21 PM|
Hi, do you have the 2016 annual ? Thanks.
|Subject||2016 annual report|
|Entry||05/10/2017 12:40 PM|
|Entry||05/10/2017 12:44 PM|
|Subject||Business & Valuation Update|
|Entry||06/29/2017 08:05 PM|
Thank you for your work and commentary on Ash Grove Cement over the past few years. After reading your work and Broncos, we decided to take a look. What we found is a terrific set of assets that are operated well and, despite the lack of transparency (arguably secrecy), a pretty shareholder friendly company. In summary, we found (1) a good business, (2) an egregiously low valuation and (3) the likelihood that we are entering good timing in the cycle. We will summarize some points that we found on these three below to add to the conversation. In addition, there is a peculiar, value unlocking catalyst which we are trying to better understand and will put in a separate message:
1) Good Business: At the very high level, we found that Revenue per Share and Tangible Book Value per Share (excluding GW & Amortization) have compounded at a 6% and 8% rate respectively over the past 20 years. The company also has not suffered an operating loss in (at least) the past 20 years. This includes the financial crisis when they still generated nearly $150M of EBITDA and $50M of after-tax FCF at the bottom of the cycle. For a business that is best defined by regional oligopolies/monopolies, Ash Grove has strong market share of domestic manufacturing capacity within 300 mile radius’ of their facilities. We estimate the annual capacity of the facilities and Ash Grove's market share of capacity within 300 miles radius elow. This obviously doesn’t account for their 3M tons of combined import capacity in Portland and Houston.
Based on USGS data from 1992 to 2013, we estimate that their regional markets have outperformed the U.S. cement industry by roughly 3% on price and 1% on utilization on average.
Finally, while the Company doesn’t break out its segments, we do know that it has vast rock resources for its cement business as well as a smaller aggregate/ready mix business. In this regard, the Lyman-Richey is the largest wholly owned corporate subsidiary of Ash Grove providing ready mixed concrete, sand, gravel, and related construction materials through nine operating customers across the Midwest. Founded in 1884, it now has over 50 permanent locations with roughly 800 employees. As a matter of context Martin Marietta (a $16B company) has roughly 8000 employees. Not like for like we are sure, but this implies a value to Lyman Richey of $1.6B which compares to roughly $1.2B in Enterprise Value (excluding pensions) and $1.4B in Enterprise Value for all of Ash Grove.
2) Egregiously Low Valuation: For those checking Bloomberg, the financials on Bloomberg are very old. For an updated reference, Ash Grove has 7.34M shares outstanding (basic & diluted). At $250/share, the MC is $1.834B. The company has $642M of Cash, Short-Term Investments, and Available-for-Sale Securities on its books. It has $39M of debt. So net cash is $603M. They also have a pension which is underfunded by roughly $170M. So EV is either roughly $1.23B or $1.4B depending on whether you want to count pensions or not. In 2016, they did $316M in EBITDA. We estimate $335M in EBITDA for 2017. So we are talking 3.6x-4.1x 2017E EBITDA. Comps are above 10x (some more like 15x).
3) Good Timing in the Cycle: Without getting too much into the weeds here, a combination of regulatory, geographic, and funding/time horizon hurdles has effectively capped material new capacity in the United States for at least a while. If you look at historical data provided by the Portland Cement Association going back to 1993, we are effectively 10%-15% below our normal cement demand per capita in the United States. Since infrastructure on bridges/roads is 5x as cement intensive as residential or commercial development for a dollar of construction, a general increase in federal/state (or even private) spending should bring us back toward a normalized level over the next 3-5 years. The FAST Act should start to let (result in actual cement use) over the next few months and various states have approved additional gas taxes and spending on roads/highways. This trend will tighten the market from roughly 85% of practical domestic capacity today (and roughly 33% of import capacity) to low 90%s of practical domestic capacity (and probably 60%+ in imports). Historically, pricing rises by a multiplier of changes in utilization. The chart below looks at pricing with a 1-year lag to utilization changes, it appears that pricing rose at roughly 3.6x the change in utilization in the late 1990s and roughly 7.7x in the mid 2000s. :
From a future EBITDA/FCF perspective, we take the base case volume forecasts from the Portland Cement Association and apply volume growth at a 1% lesser rate annually for Ash Grove through 2021. This is roughly a 4% volume CAGR through 2021. Then we apply roughly a 2x Price change to change in Utilization for the Company. When you flow through the analysis, Ash Grove is generating roughly $600M in EBITDA in 2020 and $700M in EBITDA in 2021. This equates to roughly $335M and $400M in after tax FCF in 2020 and 2021 including funds for both maintenance and growth capex. More shockingly, assuming today’s dividend, capex in the $100M-$120M annual range (v. $84M in 2016), and no buybacks, the company will have over $1.5B in net cash and securities on its books. It will be a Net Net opportunity!
Finally, we think there is a strong basis for a strategic capital allocation or some transformative catalyst is coming. We are putting this on a separate post and we appreciate any feedback and help in thinking this through. And again, thanks to Snarfy and Broncos for the introduction to the idea.
|Entry||08/10/2017 11:36 AM|
Does anybody have the Q2 results? If so, could you post please? Thanks.
|Entry||08/29/2017 05:37 AM|
I have a very intimate question about this company. If you could contact me at email@example.com that would be appreciated. It is one of this rare cases in which one prefers to keep things private, no disrespect for the VIC community and its members.
All the best.
|Entry||09/21/2017 03:27 AM|
|Subject||Re: Re: Re: Congrats!|
|Entry||09/21/2017 09:08 AM|
A triump of value investing. Congratulations!
|Entry||09/21/2017 09:54 AM|
Great catch, zbeex. Yes, ~$550/sh is my reading of the press release.
|Subject||Re: Re: Thanks, Snarfy!|
|Entry||09/21/2017 10:00 PM|
Thank you to this informative board and for the kind words. Quick question - there appears to be a 15 day 'go shop' window here. If that is the case and our best guess is that this hasn't had a full on 'process', might other buyers come out of the woodwork? Frankly, we find the valuation fair...but not full. Any thoughts on likely entrants? Anyone know if they really did run a full on process?
Anyway, thanks again for the sharing of materials and thoughts...value of a community. Good stuff.
|Subject||Spoke with the company yesterday|
|Entry||09/27/2017 11:59 AM|
In the next few weeks they will be mailing out a document that is the functional equivalent of a proxy.
|Subject||Re: Competing Bid|
|Entry||10/06/2017 08:51 AM|
great news! what is the value of the competing offer on a per share basis including cash? is it something like $570?
|Subject||Re: Re: Competing Bid|
|Entry||10/06/2017 02:01 PM|
The CRH bid was $531-548 taking into account both the acquisition price and the special dividend. Assuming the competing bid from Summit leaves the special dividend unchanged, it represents an incremental $27-41 per share, for total consideration of $558-589. Upside from the current quote of ~$540 is 3.4-9.0%. Assuming the deal closes at the end of Feb-2018 (a pure guess), that's an IRR of 8.1-22.5%.
|Subject||Re: Re: Re: Competing Bid|
|Entry||10/06/2017 02:09 PM|
CRH has a $131 million termination fee so the incremental value of $2-300 million is actually only a net $69-169 million to shareholders, or a $9-23/share upflift from the prior offer. I'm far from an M&A expert - does anyone see any antitrust risk or any other reason this deal would not go through? Thanks.
|Subject||Re: Re: Re: Re: Competing Bid|
|Entry||10/06/2017 06:21 PM|
|Subject||Re: Re: Re: Re: Competing Bid|
|Entry||10/06/2017 07:51 PM|
abcd1234 -- should we tax effect the termination fee... not sure how these are treated...
|Entry||10/25/2017 07:41 PM|
Just got the proxy in the mail. Here are scanned copies of the background and fairness opinion sections in case anyone is interested.
I thought it was very interesting that when they decided to sell the company, the first two potential buyers they approached turned
|Subject||Re: Re: Merger docs|
|Entry||10/26/2017 05:15 AM|
Can you please elaborate on this?
|Subject||Re: Merger docs|
|Entry||10/26/2017 07:54 AM|
Hi, Erst10710 --
Well, it doesn't seem to have leaked, and the board refused to shaft outside shareholders, both of which are shocking violations of traditional Wall Street, etc.
|Subject||Re: Re: Merger docs|
|Entry||10/26/2017 01:43 PM|
Agreed. Never thought the Street would stoop this low.
|Entry||11/16/2017 12:34 AM|