Where are the good value stocks?

It might. I’ve never looked at this and am only tangentially familiar with hot dip galvanizing (I was surprised to see that this is a growing segment and quite profitable because I had thought that was a bad business characterized by chronic overcapacity).

I glanced at a tear sheet for two minutes. This would have been a great stock pick in 2006. You can look at the chart and know that (because the stock is up 6x) but I didn’t have the chart up, I was just looking at the numbers. Apparently they changed the business model in FY06-07 and and took cash / cash returns from ~9% (shit) to an average of 25% over the last 6 years (defined as EBITDA / total assets here). That’s pretty impressive.

I take it they are probably buying out hot dip plants and then running them more efficiently somehow? Goodwill is going up consistently so it must be some kind of roll up. Is it scale / distribution in a fragmented industry?

Doesn’t jump out as cheap on a quick glance but would have been interesting at $5. Do you have a reason to like it today? There could be a reason, I don’t know. Generally you have to find these before the long running sustainable improvement in results, which then inevitably becomes a multi-bagger with sell side coverage (6 analysts here) that is probably mostly efficiently priced. This stock in 2006 is a classic example – some crusty business in Texas doing boring shit, sub-200 million in cap, I’m sure nobody called them or visited HQ, etc., etc.

This is why it’s important to be able to look at many stocks quickly and keep tabs on various names. People who follow 5-10 stocks religiously are at a major disadvantange.

It was a stock I had high hopes for like 2 years ago and I decided not to invest in it as I figured the business sounded too commodity-like and leveraged. Obviously that was a mistake. but I was even more of a newb than I am now.

How did you figure out they changed their business model in a 2 minute study?

Any hints on metrics that indicate an “inflection” point for a crappy company?

I have access to custom tear sheets that have up to 20 years of historical data on an annual basis + 12 trailing quarters. Nothing that others don’t have access to, but it’s centralized and I can rip through a stack of print outs very quickly this way. Sort of like Value Line but on steroids. I actually have some difficulty looking at regular financial statements – I can do it obviously but it takes me a minute to adjust. I only look at the regular financials when I need to scrub out data or pull segment information. I think it’s a huge competitive advantage to look at things over a long time period when most people are only looking at 2-3 years of data in 10-Ks.

I tend to start with annuals to try to figure out what I’m looking at and what quality the asset might be. I expected AZZ to be sub-10 % cash / cash but it was actually much higher than, as high as 30% in recent years (avg about 25%, with no years below 20% in the last 6 years). That metric includes the goodwill, so they are apparently buying stuff for decent prices and then squeezing a lot of cash out of it. This is a great model (whatever they’re doing, I still don’t know) if it is sustainable over time, because the purchase basically pays for itself in 4 years on average on an EBITDA-basis. Holy moly, Batman! And they did it without leveraging the company up.

That was not always the case and the business had closer to 10% returns on average pre-2006. Whatever they were doing, this was a pretty shitty asset back then. Not the worst most likely, but certainly nothing to get excited about. I’m basing that comment strictly on the numbers since I still haven’t done anything more than read the business description.

The reason the stock would have been a buy in 2006 is because they were clearly developing some kind of value creation process. Free cash flow in 2005 was zero and it peaked at 71 in 2009 with no balance sheet funkiness (not working capital run off or some other one time situation) – these were legit operating gains. And the fact that cash / cash was high shows that they were not dramatically over paying for this free cash flow generation.

I still don’t know what they did, but my guess is they bought shitty galvanizing plants and ran them better / more efficiently than someone else. It’s hard to think of many value creation pitches that are less interesting sounding than that, but not interesting is good. People want to talk about owning facebook and Zynga, they don’t want to show up at the martini party and talk about that exciting hot dip galvanizing stock they just bought.

They had some fatty bobatty gross margin expansion during that time as well, from 22% in 05 to 35% in 09 (pre-DA gross margins). People cry in their cheerios about 50 bp gross margin moves because it messes up their models by a penny, but that’s just noise. When a company adds 13% to their consolidated margin in 4 years that is a really big deal though.

I bet if you had called or visited this company in 2006 you could have foreseen a lot of this before it took place and made a bet that the stock would go up 2-3x in value based on normalized cash flow or operating income over that time period. The fact that it actually went up 6x would have been gravy.

Inflection point would be the assets becoming more productive, new products, new management unlocking value, better capital allocation. The metric is cash production, at the end of everything, that’s all that ever matters. How much cash is invested in the asset and how much cash does that asset produce, and what is the outlook for the change (if any) in the cash generation ability of that asset. That’s what capitalism is and stocks always reflect that over time.

Great info, appreciate it as always!

bromion…what is this 20 year tear sheet you got?

Palantir, i might join you with PH…i’m looking to exchange that for General Dynamics which has been a non performer for me…

Custom template with a factset data stream

damm, we skipped out on factse, they came and pitched to us but we didn’t think it was worthwhile…i have bloomberg, capIQ, and reuters…

That’s always the worry with this stuff. That being said GD seems to be the best of all the defense suppliers and I have wanted to go long GD from time to time as well, but I guess defense is going through a readjustment right now…so we could be right on the valuation but may not immediately pay off. Perhaps one way to play this is by buying long term options?

To some extent we may have similar worries with PH. It’s tied to volume of global manufacturing, if that continues to struggle, I don’t expect a great run for PH, but the firm does pay divs and buy backs.

Frank - You think a generics manufacturer like Teva could replicate Coke’s business model?

Aka tiny pharma with good drug wont have the manufacturing and distribution prowess to bring a drug to wide market, especially globally, but a powerful generics manufacturer could easily do that. The reason being that patented drugs may not have their patents upheld in EEMs, but a manufacturer with scale will not need patent protection…

PH won’t lose money over time…i just read their 10k this morning and like the company although i have no idea what control products really are…but i can see the company is well managed and of decent quality. i’m hoping the stock stays around these levels so i can get in.

GD has been one of the worst performers (if not the worst) in the space since I bought it (1 year ago)…all the other guys gone up like 20% despite financial performance being quite similar…TEVA is also a significant underperformer since my purchase 1 year ago (its the worst performer in the generic space) though i have added to TEVA rather then sold.

Frank, just curious, how many stocks are in your portfolio, and how many are in the universe that you regularly investigate. Do you do a screen-then-deeper-dive approach, or do you have a smaller number that you just look at and revisit regularly? (I’m not setting up for a criticism here, just genuinely curious)

Frankie…you looked at Neustar ever? Seem to be a state sanctioned monopoly with very scalable model…

I have approximately 12 stocks spread over 4 portfolios.

I screen through bloomberg so i get a list of about 12k stocks…i don’t screen by p/e or whatever, i just take all the stocks and arrange them by certain attributes like p/e, margins, roe etc but i don’t leave them out…when i see something that looks decent i go on google and look at their company description, if it is something i can understand immediately and thik its interesting i investigate further by looking at raw balance sheet data then i read the annual report…i haven’t been doing this very recently though as i have been busy with a lot of names already…i also have S&P 500 guide and other stock books that i flip through whenever i get the chance…

TEVA’s exposure to emerging markets is actually very small…to enter the market you will need to have distribution agreements with pharmacies etc while meeting a whole set of regulations (bribing people)…its not easy to leverage like coke…coke from what i see is problably the best business in the world in terms of barriers, ease of entry into new markets, repeatablility, brand etc…i just think TEVA is a solid company selling for very cheap…i might be wrong as nobody is buying TEVA right now…i could be missing something very obvious.

Stock closed near $63 today. Nice work!

^ agreed with the above. Awesome!

Yes. Seriously.

I missed this…what’s cash/cash returns? Is that EBITDA/total assets?