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.