Description

Matthews International has three characteristics that typically line up for a great equity investment:

1. Deeply discounted valuation – here we are creating a good+great business at 11% FCF yield
2. Unloved/undiscovered stock – you’ll be hard pressed to find anyone who knows this well
3. Catalyst to unlock value – IPO of a segment worth more than the current market cap in 2024

Summary: Matthews (MATW) is an unloved diversified industrial company with solid businesses in packaging and memorialization. They are *also* the leader in machinery to produce dry battery electrodes and have won Tesla as their first customer and are being courted by other OEMs. The entire battery manufacturing process is likely to move to dry electrodes over the next 5-7 years, and the equipment business will be a $5bn+ market. I believe they may IPO this segment where it could be worth more than MATW’s entire current market cap.

Business Description:

MATW is divided into three businesses – Memorialization (57% of EBITDA), SGK Brand Solutions (20% of EBITDA) and Industrial Technology (23% of EBITDA). The bulk of this thesis is around the Industrial Tech segment, so I will quickly summarize the other businesses first.

Memorialization – MATW is the global leader in products for memorialization and funeral homes. They are #1 in bronze, granite, and cremation memorials, #2 in caskets, and #1 in cremation equipment. They have deep relationships with the highly segmented funeral home market, a broad product offering, and 100+ years of history.

Although morbid, the memorialization business is extremely stable, with a demand a function of demographics with highly predictable trends.  The business operates at over 20% EBITDA margins and has now entirely cycled the COVID-related increase they saw in 2021 and 2022. The only trend of note is an increasing percentage of cremation in their industry, and their cremation related products have taken market share and now make up almost 20% of sales in this segment, from less than 10% a decade ago.

They get a few % of pricing per year along with increased market share in cremation (which has grown at about a 9% CAGR recently). This is a very solid, slow moving, high return business where they are the market leader and its going nowhere. The public comp Service Corp (SCI) trades at about 10x EBITDA despite having much more significant headwinds from the cremation trend. This compares to all of MATW at 8x EBITDA.

SGK Brand Solutions – This is MATW’s design and packaging business. They design, create and produce packaging for consumer products brands, and have many of the world’s largest CPGs in their client base. They are pretty far up the value chain producing equipment for printing on specialized materials – in fact, this is where the technology that eventually became dry battery electrode “printing” came from (more below).

SGK strikes me as a solid business, although recently it has undergone challenges in Europe due to exposure to Ukraine and Russia. With these shut down, their lack of scale in Europe became a problem and these operations drug down the otherwise healthy brand business in the rest of the world. MATW has taken action and it does seem like they have stabilized this business in recent quarters, albeit at a lower level. The comparisons here aren’t perfect – Veralto’s packaging business is not a bad comp (Veralto prints “best by” dates vs SKG printing Nutrition Facts), but some of the business resembles an ad agency as well. The end markets are strong and stable, and I think that as they digest the European business this too should be a double digit EBITDA multiple business – or they may just decide to sell it. Note – some of the financials here are misleading as they transferred their surfaces and engineered products division over to Industrial Technology in late 2021.

But before we get to the truly interesting stuff – I think its clear that MATW has two solid, if not incredible businesses that should be stable and earn decent returns on capital. Likely too cheap at a 11% FCF yield if this is all we were talking about. Fortunately, there’s more:

Industrial Technology:

MATW’s crown jewel is their industrial technology segment, and within industrial tech their energy storage solutions business.

We don’t have a ton of disclosure, but this segment has three businesses –

• Product Identification, a razor/razor blade business for printing high volume labels – transferred out of packaging recently
• Warehouse Automation – software and hardware integrated for order fulfillment
• Energy Solutions – Advanced calendaring systems for the production of dry-battery electrodes and embossed cylinders in hydrogen fuel cells

The first two segments are good, growing businesses with nice secular trends. But the real story here is in the Energy Solutions business.

Dry-Battery Electrodes

Currently, every EV battery on the planet (save one model) is made via a wet coated electrode process. At a high level, it involves mixing a highly toxic and highly sensitive slurry of lithium and various viscous elements into a liquid that has to have an exact density. Then, copper plates are coated with this slurry, its baked in a giant oven, then its calendered (pressed/thinned out), some of the toxic solvent is recovered, then it is dried again, and then rolled into a cathode/anode.

This process is not very efficient, as keeping the slurry mixture a fixed density is hard, you lose material in the recovery process, the mixture is highly toxic, the calendaring machines have to be cleaned constantly, and you have multiple time-consuming drying steps. But this is how basically the world’s anodes and cathodes are made that go into EV batteries today.

There is *one* company in the market today producing, at scale, a solution that avoids this process – Matthews. Their process (9 patent families) involves directly pressing the lithium unto the substrate with precision calendaring machinery (that they sell), entirely skipping the slurry, toxicity, drying and recovery stages.

The process is vastly cleaner, faster, and creates a more efficient battery. At scale MATW believes this process can reduce equipment costs by 70%, labor by 75%, power by 75%, and dramatically improve the speed of battery manufacture.

And – this is up and running. Its unclear whether both anode and cathode are being produced, but  the only dry battery electrode vehicle in the world is (finally) rolling off the line in giga Austin – the Cybertruck.

And look – I get it. The Cybetruck is beyond stupid. But that is not really the point here – the vehicle is essentially a proof-of-concept for a new way to produce batteries, and after years of false starts, the process is working.

I don’t think the market is very aware of this. MATW isn’t allowed to disclose details on their calls, but you can see Matthews machinery on the battery line at Tesla, and its been confirmed in the press. One article in the Pittsburg Post Gazette (now behind a paywall) has some interesting quotes:

Tesla is likely just the first customer to come on board. Further on in the article:

OK – so MATW is the only player actually producing what is likely to be the next way that EVs are powered – dry battery electrodes. And we finally have cars that are rolling off the line with this technology, however ugly they may be.

Opportunity

OK so what is the opportunity here? The way to think about it is not whether the Cybertruck is going to sell a lot of units (news flash: it won’t) or even about EV penetration --where expectations have come back to earth somewhat. The question is – of EV batteries made, what type of penetration can Matthew’s dry battery electrode machines get?

We have some limited disclosure of how much revenue this business is doing, although I’ve had to make some guesses given acquisitions they have made recently. I think this is fairly close:

I’ve assumed they make it up to a bit over 10% of the market by 2027. This seems pretty conservative given:

1. They are only in one vehicle and will likely do 5% of the market in 2024
2. They are the only player with machinery producing these electrodes deployed today, a huge head start over peers
3. They have 9 patent families protecting their processes – this may end up being something closer to 50%+ in a bull case where their IP is differentiated

Catalyst:

As the above table shows, even relatively modest near-term sales multiples for this business yield huge portions of the market cap in value. The catalyst is simple – I expect MATW to IPO either the Energy Solutions business or the entire Industrial Technology business in 2024.

The IPO will allow MATW to raise cheap capital to massively ramp the production of their machines, give them a new currency to pay employees, and generally draw attention to what they’ve spent the last decade building. It also makes industrial sense, there is no reason to have this business hidden behind Memorialization and Packaging businesses.

And of course, valuing high growth battery related ventures is hard – if we look at battery tech peers, many of them burn huge amounts of cash and barely have any sales. QuantumScape (QS) trades at 15x 2026 sales. MATW’s IPO has a real product in market, it generates real margins (I think a 15% EBITDA margin or so today, with scale to come), and has real customers producing real cars. Hard to find comparables in the battery tech space with these bonafides.

I believe an IPO of this business will be a culmination of the effort that this management team has put into this opportunity and could attract a ton of interest. And I think the shares currently have essentially no premium for such an event.

Valuation:

MATW is cheap:

In the above analysis I’ve adjusted free cash flow to ignore working capital, which over the period kind of balances out anyway. They used some for the Cybertruck ramp in 2023 which they will get back in 2024 (so FCF likely better than I have modeled here), but figure this is a more honest way to look at it. I’ve also assumed continued issues at SGK Brand solutions and slow growth (2%) at Memorialization.

Regardless, we are looking at an 11% FCF yield at under 3x leverage for 2024. Behind this is a series of very stable businesses with the potential for a game-changing IPO. Finally – MATW has little coverage and I haven’t seen much interest in their battery business – something I expect could change in 2024.

Risks

1. I think your biggest risk here is – as happens with a lot of smallcap names in this range – the market just never cares about the battery business and management delays any corporate action for a while. They could do so because they just want to the business to be bigger when they IPO, for example. And while the growth will eventually bail you out, there are a lot of “boring” businesses here that may obscure the story for a while
2. The SGK Brand Solutions business has not been performing well and while they have made progress in recent quarters, a setback here is certainly possible. Its only 23% of pre-corporate EBITDA but further declines here could mask the growth elsewhere (as has been the case in the last few years)
3. Tesla, EVs, and Cybertruck do not hold the cache that they once did, and so if the name becomes associated with “Cybertruck success,” the narrative could backfire

Disclaimer

This document is for informational purposes only. All content in this report represents the author's opinion. The author obtained all information herein from sources believed to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind — whether express or implied. All expressions of opinion are subject to change without notice, and the author does not undertake to update or supplement this report or any information contained herein. This report is not a recommendation to purchase the shares of any company. The information included in this document reflects prevailing conditions and the author’s views as of the date submitted, all of which are accordingly subject to change. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity. Any or all forward-looking statements, assumptions, expectations, projections, intentions or beliefs about future events included in this document may turn out to be incorrect. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment prior to making any investment decision.

Catalyst

IPO of battery business in 2024 / Other Corporate Action

Announcement of other large contract wins in battery tech