Two very different un-researched companies

I'm combining two companies into this post because each company doesn't have enough to fill a post on their own yet they are interesting enough to discuss, these are true oddball stocks.  If people seem to like this format I'll probably continue it as I journey through my 2003 Walkers Manual of Unlisted Stocks.

Before I start both of these companies are small (although on different spectrums one $9m, other $1b) unlisted stocks and illiquidity can be a problem.  Both companies below are fairly illiquid although Ash Grove Cement is a bit more liquid than OPT Sciences.  DO NOT USE A MARKET ORDER WHEN ATTEMPTING TO BUY!

I also want to mention that Ash Grove doesn't list their financials online or to the SEC.  If you want to get an annual report you need to buy one share, fax the company proof of shareholding and they will mail you a copy of the 2010 report.  I would expect the 2011 report to come out sometime in March.  I went through this process and it's pretty easy and quick.

OPT Sciences (OPST.Pinks)

Price: $11.80 (Last trade 12/19/2011)
Market Cap: $9.15m
Shares: 775,585

OPT Sciences manufactures anti-glare coatings for glass and LCDs.  Their main customer is the aviation industry who uses the coatings on airplane instrument panels.  There isn't much to discuss regarding the actual business, it's pretty straightforward.  If the aviation industry is doing well OPT Sciences is doing well and visa versa.  All orders are customer made to specification meaning that sales vary quarter to quarter, delivery time is between four to twelve weeks.

What got me interested in OPT Sciences is that the company is selling for a discount to it's net current asset value, or in other words this is a net-net stocks.  I have my net-net worksheet below:


The big risk with OPT Sciences is that their two largest customers make up 69% of sales.  Additionally their delivery timeline is the customer's timeline and not based on their ability to manufacture.  The second risk is that 66% of the shares are owned by the Arthur John Kania Trust further limiting the float and any chance for a shareholder to stir up the pot.

Investment highlights
-$12.34 in gross cash per share, $11.59 of net cash
-Manufacturing facilities owned free and clear, no debt
-$4.7m in sales 9 months ending July 30, $4.9m in sales 2010, $4.8m in sales 2009
-$.77 EPS 9m 2011, $.59 EPS 2010, $.35 EPS 2009
-23% ROE with excess cash removed
-35% ROIC in 2010

This is an impressive little company, most of their 2010 and 2011 results are from pent up demand following the 2008 and 2009 downturn.  Even if earnings shrink there is still a considerable margin of safety considering the investor is able to purchase for less than liquidation value.

The only problem with OPT Sciences is that liquidity is very limited and it doesn't seem that there's any sort of value creation catalyst.  The company states they are unlikely to pay a dividend in the future so for now that cash is locked away tight.  My guess is that at some point the trust that owns a majority of the shares decides they want a bit of liquidity and the company starts to pay out earnings and possibly cash as a dividend.  If I could ever get an order to fill I'd be happy to own a bit of them and sit back and wait.

Ash Grove Cement (ASHG.Pinks)

Price: $128.03 (12/21/11)
Market Cap: $1.048b
Shares: 8,190,061

Ash Grove Cement as its name implies is one of the largest portland cement producers in the US.  The company has facilities spread across the western US and is headquartered in Kansas City.  The cement business is pretty simple, buy aggregate, add sand, crush it and distribute as cement mix or add water and distribute as cement in a truck to a construction site.

What got me interested in the company was seeing that they had a ~$200m market cap and over $1b in sales back in 2008.  The market cap figure listed was wrong on the site I was looking at but it was too late at that point, I didn't realize this until I got a copy of the annual report.  The company had quite a run of sales going from $682m in 2001 to $1.2b in 2007.  Sales dropped off from during the financial crisis falling to $872m in 2010 tracking the fall in housing.

Cement production is pretty resource intensive with high fixed costs which have really hurt the company the past few years.  The gross margin in 2009 was 21% and 15.8% in 2010, net margin was 7.9% in 2009 and 4.28% in 2010.  In the annual report management warned that they expect conditions to be even worse in 2011.  In the winters of 2010 and 2011 the company idled their plants because inventory storage was full and it was unlikely that it would be worked down over the winter.

The balance sheet is interesting, the company is selling for far less than book value, the depreciated value of the PP&E is $167.85 a share alone.

Investment highlights:
-EV/FCF 8.5x
-EV/EBIT 15x
-11x interest coverage
-1.7% weighted average rate on the long term debt, it seems some of this is due to state sponsored bonds.
-$30.29 a share in cash and cash equivelants
-$206.13 book value
-Pays a $1.76 per share dividend
-Earned $4.56 in 2010 per share and $8.44 in 2009

Ash Grove Cement might be a good investment if the housing market starts to recover or demand for cement picks up.  The company has the balance sheet to wait out a long recovery, they've been in business for 130 years and even in this dry stretch have been able to operate profitably.

If you're interested in any further information drop me an email.

Talk to Nate about either company

Disclosure: Attempting to buy shares in OPT Systems, no position in Ash Grove Cement

3 comments:

  1. I am trying to find an annual report for Ash Grove Cement but I can't find one. They do not seem to file?

    Thanks

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  2. Did you ever get your OPST order to fill? The company has traded every few weeks over the last several months. The bid and ask are way off of one another and there's actually some volume behind the bid at lower prices.

    I'd like to own it as well. I actually stumbled upon this Net-Net a couple years ago when I was randomly reading the latest SEC 10-Q filings RSS feed. Couldn't believe my eyes, kept checking to see if I had done my math wrong. Then I started reading around and found out a lot of value guys were on to it. But still, the actual company is trading for $0. You're buying a pile of cash plus a company.

    What bothers ME now, though, is they put the cash into a marketable securities portfolio. I have to double check but I think it's either some crappy equity mutual fund or some crappy corp bond mutual fund. Either way, I don't need a bunch of Wall St goons misallocating the company's capital for me! In my mind, that defeats the whole purpose of buying this pile of cash because now it isn't as liquid and it has a risk of loss attached. If the market craters, I feel confident that portfolio will go down with it and I just don't want to play that game.

    So, I insisted in my model on discounting it 75% to account for the impact of a sell-off/higher interest rates, and with that my preferred buy price is like $10/share. But that's still treating the underlying business as having 0 value. I actually think that's extremely unfair in this situation. The company has concentrated customers and isn't in an exciting industry but I actually think a niche instrument panel service for 737s and other aircraft is probably about as stable as you can get-- the world can go to absolute hell but the fleet of 737s will still be getting turned over, they're like the most efficient commercial aircraft ever.

    So, anywhere from $12-current price ($12.75) is probably still a fair price even with most of the cash now invested in Wall St volatility models.

    But... I'm picky. Hard for me to swallow that pill. But I've been inching my bid up, every so often.

    ReplyDelete
    Replies
    1. Taylor,

      I got a fill a few days after this post, at $11 I think. I've just been sitting tight ever since. The best thing to do is just put in a good til cancelled order and let it sit, if it fills it fills, otherwise you find another cheap company.

      Nate

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