Description

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.

Catalyst

I'm not going to claim any catalysts.  Watching this stock can be like watching paint dry.