Author Archives: Suriel Hector

The Home Loan Financial Corp

A tiny dominant bank

The Home Loan Financial Corp (HLFN)

HLFN trades at ~6.3x FY 26’ earnings despite being a dominant local franchise with pricing power, with a growing core deposit base, generating high teens ROE and above-average ROA. Thanks to their significant market share in Coshocton County, they are able to maintain higher loan yields while maintaining structurally low deposit costs, contributing to a stable and above average NIM. The company has grown earnings and book value consistently, even during the recent yield inversion period in 2022-2024. I believe the bank deserves a more reasonable multiple of 10x earnings, implying a 58% upside from today’s $35 price per share.

Snapshot:

Overview

The Home Loan Savings Bank was founded in 1882 as a mutual savings and loan association. In 1998, the bank converted from mutual to stock form of ownership and began trading on the public markets as The Home Loan Financial Corp. They operate out of five branches across Licking, Knox, and Coshocton counties in Ohio. Recently, they opened a new branch in Newark, Ohio, which is a higher traffic county. The bank has ~$370m in assets as of latest quarter.

Coshocton County

The bank mainly does business in Coshocton County and the immediate area around it. Coshocton is not a fast growing or rich county; the population is about 37,000 people with a median age of 41 years old. Since the county is not fast growing or rich by definition, it is susceptible to deteriorating economic conditions. However, this environment creates a significant competitive advantage to HLFN in the form of lower deposit betas, deep borrower knowledge, and high customer stickiness.

Loan officers often know the borrowers personally which leads to stronger underwriting and higher collateral familiarity. During credit distress, they are able to intervene earlier and do workarounds to avoid credit loss.

Loans and Quality of Loans

The bank’s core loans are 1-4 Residential Mortgage Loans (51.5%) and Nonresidential Real Estate Loans (25.9%), with the remainder on Real Estate Construction & Land, Consumer, and Commercial Loans. Surprisingly, more than 95% of the mortgages they originate are ARMs which means that the whole loan portfolio is variable in nature.

The bank has grown its loan book significantly over the year and has been aggressive with the use of deposits to fuel this growth. Starting in 2022 you can see the surge in the loan book, and it just kept going from there. The L/D stands at 1.14 and has been above 1.0 over the last 13 years, which is quite aggressive to standards. This is what the loan book looks like in the last few years:

The quality of the loans has been quite good historically speaking. Nonperforming assets (NPA) exceeded 1% of loans only twice in the last 13 years. Delinquency rates (past due 30) have averaged 1.3% but recently spiked to 2.2%, reflecting borrower stress from higher rates.

At the same time, they also experienced a substantial jump in substandard loans from $2.8m in 2024 to $10m in 2025. Substandard loans are loans that get reclassified due to evident financial distress from the borrower or decreased collateral value which threatens its repayment. This resulted in four new troubled debt restructurings (TDRs) which means that the bank granted concessions to the borrower to avoid default and help them get back on their feet to repay the loan. These troubled debts reside within 1-4 family real estate and nonresidential real estate, with most of the increase attributable to the latter. Management has been very conservative and has been successful in covering nonperforming loans with their allowance for credit loss (ACL). The current ACL/NPL stands at 230%.

This would be worrying if they did not have sufficient equity buffers to sustain such losses. Their current Tier 1 Capital ratio is 12% vs 4-5% to be considered a “well capitalized” bank. Equity/Assets stand at 12% implying significant equity buffer. Historically, the bank has not experienced credit losses that materially impaired capital.

Deposits

The bank’s core deposit base has been growing consistently over the years, although recently, they have relied more on brokered deposits to support the loan book growth leading to substantially higher deposit costs. Brokered deposits jumped from $6m to nearly $30m from 2024-2025. This seems to be some sort of a short-term strategy rather than long term if we take a look at their history using brokered deposits. If you back out brokered deposits, the core deposit base is still growing.

The deposit base composition looks like this:

The deposit cost trend looks like this:

Their deposit market share has trended like this:

Performance

Historically the bank has performed well even through the GFC. They did not experience any loss and were actually profitable. They have become a better bank with a stronger franchise, a bigger loan book, and higher core deposits giving them access to low-cost funding all which have led to consistent growing profitability.

Below is the EPS trend since 05’:

HLFN’s performance in the past 5 years has been stellar. EPS grew from $2.74 to $5.13 in 2025, nearly doubling. This was achieved during an environment in which banks struggled as they saw their NIM under pressure as the yield curve inverted. HLFN is structurally positioned to take advantage of that environment through their predominantly variable loans and significant pricing power. As short term rates rise faster than LT rates, HLFN is able to reprice their liabilities (deposits) slower than peers while at the same time able to reprice assets faster than peers helping them maintain their NIM. That is what we saw during the 2022-2024 period. While deposit costs went up 10x, they were able to increase their loan yields so that the spread did not deviate from long term averages, muting the impact of higher deposit costs. Their NIM did not fall unlike other banks that faced NIM pressures.

They are currently generating 17.5% ROE without significant leverage. ROA sits at 2.1%. They are a very efficient bank, keeping operating overhead to a minimum which contributes to its above average profitability. Their efficiency ratio stands at 45% which is unheard of. Over the past 13 years, the highest the ratio has been was 54% which is still significantly better than your average community bank with efficiency ratios of 65%+.

With a strong and growing core deposit base, higher pricing power, and growing loan book, I expect the bank to continue growing EPS in the foreseeable future across different rate cycles. HLFN should be reporting around $5.52 eps in FY 26, an increase of 8% from FY 25.

Management

Management has been very under the radar. If you look for a LinkedIn profile, you won’t find anything. I have looked and looked to at least see the face of one of the executives. Finally, I did find a video of the bank’s advertisement on YouTube where they show the CEO of the bank, Kyle Hamilton (Age 53), the son of the chairman. Robert Hamilton is the chairman of the corporation and is 83 years old.

Together, the Hamiltons own approximately 21% of the company, with the rest of the shares owned by HLFN’s ESOP (9%) and other local community members.

Management has been paying dividends, increasing it consistently every year. They recently increased the dividend by 9%.

The current dividend yield is 6%. The last time they have bought back shares was in 2013 and they have not diluted shareholders.

Valuation

Despite strong operating performance and long track record of earnings and book value growth, the company is now trading at discounted multiples relative to peers. It seems like investors forgot about the company. No one has written about it in the past 10 years, besides Dave Waters of Alluvial Capital mentioning it post-GFC. I believe this is due to the lack of liquidity (trades only roughly 200 shares daily), the fact that it is traded OTC (no coverage), and their rural footprint.

The company is currently trading at 6.3x FY 26 earnings and 1.1x TBV. This is extremely low for a quality community bank. By comparison, the company traded at 13x earnings pre-covid, and the price has remained flat. Since then, EPS has doubled, deposit base expanded, NIM widened, and ROE improved substantially. At current prices, investors are getting a 15% earnings yield on a well-managed, strong local franchise with significant and growing market share in their respective market.

The bank is able to generate high teens ROE without being substantially levered. It has an equity/asset ratio of roughly 12% which is substantial and provides a significant equity buffer if a loan were to go wrong. Tier 1 Capital ratio stands at around 12%, a ratio significantly above the 4-5% range required to be a “well capitalized” bank. This means that they have levers to put to keep on increasing ROE. They could borrow significantly more money, or buy back significant amounts of stock, or in the most likely scenario, pay a huge dividend to take advantage of the significant buffer they have and to put that standstill equity to work.

I believe HLFN deserves a higher earnings multiple, something closer to peers that reflect the strength of the franchise. A 10x multiple more closely reflects the bank’s quality and yet one can argue it is a conservative multiple as this is not your average community bank. At a price of $55 per share, or a reasonable 10x multiple, this opportunity provides a 2-year return of 58% or a 26% IRR.

Risks

Increasing delinquency rates

Continued overreliance on brokered deposits

*Disclaimer: The information provided in this write-up is for informational and educational purposes only. It should not be considered as financial advice or a recommendation to buy, sell, or hold any security. The author is not a licensed financial advisor and does not purport to provide professional investment advice. The analysis presented is based on the author’s personal research and opinions, which may be subject to errors, omissions, or changes without notice. Any investment decisions should be made after conducting your own thorough research and consulting with a qualified financial professional. The author and any associated parties are not responsible for any financial or other losses incurred based on the information provided in this document. Past performance is not indicative of future results. Always consider your personal financial situation, risk tolerance, and investment objectives before making any investment decisions.

Inter-Rock Minerals

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A Quick Intro:

This is my first investment in a Canadian listed company, credit to Joe Raymond who directed it my way and broke my bias. I started looking at it in the summer when I bought some and meant to write this up for a while.

The company is listed in the TSXV trading as IRO.

All figures in USD

Inter Rock Minerals

Trading at 2025 6.6x EBIT, Inter-Rock (IRO) presents a compelling opportunity that seems to be missed by the market. Inter-Rock is able to generate strong returns on invested capital and has a solid path for growth in the dairy feed industry through geographic expansion and R&D marketing to consultants, which are often the decision makers for feed rations.

Snapshot:

Price: $0.83

Diluted S/O: 39.1m

Market Cap: $32.45m

EV: $26.6m

Overview

IRO has two businesses, Papillon Agricultural and Min-AD. They produce, market, and distribute premium specialty nutritional products for the dairy industry. Through Papillon, they produce protein blends, amino acids, and probiotics/prebiotics for both the dairy industry and beef cattle. At Min-AD, they extract and process dolomite and clay products for dairy and beef cattle feed. The specialty dolomite is used as a source of magnesium and calcium and as a rumen acid buffer. Most recently they launched a new clay product used as an anti-caking agent and toxin control.

Papillon

Papillon produces protein blends through toll manufacturing agreements for the dairy industry. They also produce prebiotics and probiotics, and a clostridia control product for dairy cows called Baciflex. This segment accounts for ~88% of revenues, and their protein product line accounts for ~⅔ of Papillon’s gross profits.

Min-AD

Min-AD’s products are distributed mostly by Papillon. Min-AD quarries and processes dolomite and clay products for dairy and beef cattle feed. The specialty dolomite is used as a source of magnesium and calcium and as a rumen acid buffer. It is an essential part of the company now that the transition of Papillon to distribute Min-AD’s product is done. Min-AD accounts for 12% of revenues.

Management

In 2015, Inter-Rock was doing ~$12m in revenues and loss making with their only businesses being Min-AD and Mill Creek (sales to glass industry). Then came 2016 when the Crombie’s acquired Papillon for $5.95m. Take a look at their balance sheet in 2015 and then post-acquisition in 2016:

Inter-Rock did not have the cash to acquire Papillon for $5.95m and they only had equity of $472,000. So, they acquired it with debt which included financing from the seller of $3.9m + $500k from the chairman of Inter-Rock + $1.5m from the bank. Papillon was a killer strategic acquisition for them, they could easily use Papillon to increase Min-AD sales on top of what Papillon itself brought, so a lot of synergies here. Post-acquisition, in 2016, revenues were now $30m and generating $1m EBIT.

Fast forward to 2021, Inter-Rock decided to sell Mill Creek for $6.4m to focus exclusively on the animal feed industry after they lost one of their biggest customers. The result of the Papillon acquisition and the sale of Mill Creek allowed the company to go from a net debt position to a net cash position over the years and shareholders’ equity CAGR’d at ~34%.

Safe to say management has allocated capital properly, growing the company from $12m in revenues to $100m+ through one acquisition and no share count dilution.

Growth Strategy

I believe the company has a simple and straightforward strategy to keep growing volumes.

They will continue growing through geographic expansion.

The most recent expansion was into the north central region of the US with the addition of a new sales manager that will cover Minnesota, North Dakota, South Dakota, and Iowa in October 2024.

Papillon has good coverage so far, however, there are still some states they have not penetrated fully yet. For example, they have not penetrated California, which is the highest dairy producer in the US and remains a large opportunity to grow volumes while gaining market share in current states.

Papillon’s marketing strategy is tailored to dairy consultants who are often the decision makers at the farms.

The dairy consultants guide the farms to optimize ration feed since feed accounts for approx ~50% of production costs. There has to be a balance between feed costs and output. If a farm is going to pay a higher price for feed ration, it has to be justified in some way, for example by increasing milk output. This is the angle Papillon takes, they anchor R&D to their products which has proved to be a success. From management’s MD&A in Q2 2024: “The Company’s results are due largely to Papillon’s efforts to generate sales in new locations and the promotion of research and development results.”

Their products are on the premium side which is why R&D is so important for them. Due to the cyclical nature of the industry, farms are price sensitive. When milk prices are high, there is more money for premium feed and nutritional products, and when milk prices are low, there is less money for these. However, the dairy industry has transitioned into a more efficient focused industry as evidenced by the stagnant number of dairy cows and milk production still increasing.

They are more open to spending more on the premium products if it is backed by R&D that shows positive ROI, which is what Papillon does. This makes them more bulletproof, but not entirely, during low milk prices as farms can only sacrifice so much feed quality without milk production taking a big hit. For example, take this testimonial out of Papillon’s website:

“When milk prices go down, many producers will analyze their ration to feed more byproducts and cut ingredients. One they won’t cut is Dairyman’s Edge® PRO. With yeast, live bacteria, and enzymes for the price of a yeast-only product, it delivers a lot more bang for the feed buck.”

Papillon will continue growing protein volumes

Papillon’s protein product line accounts for nearly ⅔ of gross profits, therefore it is essential for the company to grow these volumes and increase profitability. Papillon is able to differentiate themselves vs commoditized by-pass protein sources such as blood meal, feather meal, and soy based by producing blended bypass protein products. This means they diversify and blend together different ingredients to target certain amino-acids cows need, leading to lower feed over income costs (FOIC) and in some cases, total lower costs without a drop in milk production.

For example, in a commercial research report that Papillon released, they showed the variability in price of commoditized blood meal and their blended protein.

We can see that blended protein price has been continuously lower than blood meal itself. So essentially, dairy farms are getting the same milk output, for much cheaper.

In the case of bypass soy, it is much cheaper than both blended protein and blood meal. However, it is not entirely accurate and it does not paint the whole picture about FOIC.

In Papillon’s report they mention: “The contribution to dietary metabolizable protein and amino acids is not equal between these different proteins. The concentration of digestible amino acids in average blood meal and the blended protein example are almost double that of bypass soy and almost triple that of soybean meal. If we correct for that by expressing price on a cost per pound of essential amino acids delivered by the ingredient, the volatility of blood meal remains, but the spread between bypass soy and blood meal is much tighter.”

The benefits of blended protein are clear; it delivers double the amino acids than bypass soy for essentially the same price when accounting for how much actually metabolizable protein gets into the cow. Bypass Soy might seem cheaper firsthand, but Papillon makes a great argument on why that is not the case, and it shows their marketing angle when working with consultants.

Their protein line should keep growing volumes due to lower cost, lower FOIC, relationship with consultants, and expansion into current and new geographies. They should also be able to expand margins as they open a new storage facility to store ingredients that allows them to take advantage of price fluctuations. As we can see, blood meal prices can be quite volatile.

Earnings Power

I believe Inter-Rock is underearning compared to its earning power for a few reasons:

Write-downs and special charges

In the last fiscal year, 2024, Inter-Rock wrote down an investment they made in Embion of $435k and recorded a one-time charge of $310k for a patent purchase from a prior year they expensed. These two charges totaled $745k hit to earnings. Backing these out, operating income would have amounted to $3.15m (vs $2.4m reported) compared to $2.7m in 2024, a 16.7% increase in operating profits.

Investments in Growth

Recently they have expanded their regional sales team, resulting in an unproportionate increase in SG&A compared to revenue growth. However, these investments take time before we see any meaningful revenue growth. Recently, in Q2, we saw revenue growth picking up, and I believe this is due to past investments in geographic expansion. Over the next couple years, I believe we will see operating margins expand as SG&A growth stabilizes and top line growth outpaces SG&A growth.

Strategic synergies and efficiency gains

There are two main efficiency gains that Inter-Rock is going through that are just starting to show up in earnings. In 2024, they completed the transition to Papillon becoming the exclusive distributor of MIN-AD. This is accretive to earnings since Papillon already has a significant distribution footprint across the US dairy regions and can cross-sell the clay products. Additionally, Papillon will do all the marketing, which again is accretive to earnings and creates immediate synergies across both companies as Min-AD just has to focus on production.

The other one is the installment of an automated bagging line at Min-AD. Pretty straight forward, less labor and higher efficiency which flows through the bottom line. This was a majority of 2024 capex spend which totaled $1.2m.

Inter-Rock is currently underearning and still trading below 7x EBIT. I expect to see profitability increase with volume growth and margin expansion, reaching its full earnings power.

Valuation

After the recent run up in price (from $0.54 to $0.83), it obviously becomes less attractive. However, it is still cheap, and you would be paying ~6.6x EBIT for a ~20% ROIC business with a long runway for growth. Their strong ROIC comes from their asset-light model at Papillon, using toll manufacturing agreements to manufacture their blends instead of manufacturing it themselves. There is little capital requirement needs and why most of the capex pertains to Min-AD. As long as they can find places to reinvest, they will keep growing earnings at a high rate.

The company is using cash to buy back shares with approximately 6% of shares outstanding to be retired if the full repurchase plan is executed.

For valuation purposes, I will be using LTM EBIT as we can’t use run rate due to seasonality and would overstate EBIT. 2025 LTM EBIT amounts to ~$4m vs $3.15m (Adjusted 2024), a 27% increase YoY. Assuming a reasonable multiple of 10x LTM EBIT, we come to a 2025 valuation of $1.18/share.

Conclusion

With 20%+ ROIC and long runway for growth through volume increases in by-pass protein sales, geographic expansion, and market share gains by targeting consultants with R&D, a 6.6x 2025 EBIT multiple seems like a steal. I believe their true earnings power will start to show as investments in SG&A bear fruits, and operating leverage kicks in with revenue growth outpacing SG&A.

On the risk side, if milk prices decline materially, premium specialty products might get cut from feed rations which would ultimately affect Inter-Rock. Since their blended bypass protein product is more cost effective than commodity bypass proteins, they might have a cushion for downside.

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Risks

Significant decrease in milk prices

Increases/decreases in ingredient costs (bloodmeal, feathermeal, bonemeal)

Larger competitors entering the feed specialty market

Toll manufacturing agreement fee bump

Family control

Conrad Industries

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An Aging Fleet and The Coming Replacement Cycle

At a $60M market cap and $26M EV, Conrad Industries trades at just 2.9x FY24E EBIT (~$9M), as it enters the early stages of a major barge replacement cycle. With industry tailwinds driving an all-time high backlog and a rock-solid balance sheet (cash >50% of market cap), I believe Conrad is poised to surpass prior peak EBIT ($30M+), offering a highly compelling risk/reward opportunity.

Overview

Conrad industries operate five shipyards in Louisiana and Texas and operates two segments: New Construction and Repair & Maintenance.

The New Construction segment focuses on building a variety of vessels including barges, tugboats, ferries, etc. Repair & Maintenance segment focuses on repairing existing vessels, maintaining them, and sometimes converting the vessels into a different purpose vessel.

The US shipbuilding industry is protected by the Jones Act. The Jones Act requires that vessels that transport goods or passengers between two US ports, be built in the US, owned and crewed by US citizens. Given that, most of their business comes from Inland operators that transport goods through the US Inland Waterways and the government.

Credits to who has a great write-up on the company and re-sparked my interest to dive in. He gives great insights on the situation and would encourage everyone to check it out. I will just be following through on some points.

Replacement Cycle

I believe there is a super replacement cycle starting for inland dry and tank/liquid barges with the fleet aging to levels that cannot be ignored for much longer. With capacity for shipyards currently almost full, operators wanting to replace their old fleet will have a hard time getting deliveries soon as they compete for capacity. Arcosa, which is the largest barge maker, mentioned on their Q4 2024 EC “On hopper barges, we have backlogs through the third quarter. On tank barges, we’re sold out for 2025, and with some additional orders booked since the end of the quarter, at the current production rate, our delivery time for a new tank barge order goes deep into 2026.” This situation is not favorable for barge operators as if they keep deferring the replacement of their fleet, they run the risk of 1) Rising steel prices which will make replacement even more costly, and 2) Operating with a smaller fleet due to retirement of the fleet and not being able to receive delivery on a timely manner.

The age of the barge fleet keeps getting older, and if operators keep delaying it, it will just pronounce the cycle even more.

These graphs come from data from the US Army Corps of Engineers and we can see the difference from 2013 data to 2022 data (Top two graphs).

For tank/liquid barges we can see we have significantly more barges in the 16-25> due to the big construction cycle for tank/liquid barges during the 2010-2014 shale boom period. As time went by, new construction significantly decreased causing the fleet to age and now have nearly 30% of the fleet older than 25 years old and nearly 10% being 21-25 years old. The average age of the tank fleet is now at 20.5 years.
On the dry side we have more than 30% of barges older than 25 years old, 20% from 21-25, and 10% from 16-20. The dry side new construction has been a more depressed market due to significant underinvestment in the fleet as evidenced by the graph above. The average age of the dry fleet is 22.1 years.

USACE Digital Library – USACE Digital Library

The picture above shows the total new construction in a given year. If you look at 2013, the number of barges being built were 400% higher than what were built in 2022. With the rise in steel prices in 2021-2023, it delayed significant replacement needs which has carried over to today, leading me to believe the cycle has just started.

The positive is that the thesis does not even factor in expansion of the fleet. Frankly, I’m not sure if there will be expansion of the fleet but with the current administration planning to propose an Office of Shipbuilding and Trump trying to revive the US Shipbuilding industry, you never know. But that is too speculative to even factor in.

Kirby, which is the largest barge operator, has said that in order for them to expand the fleet, barge rates have to go up an additional 40%. Barge rates have been going up according to them and they forecast 2025 would be another good year for them as supply is as in check as they have ever seen. From their Q4 2024 EC “The 2025 order book, we think is lined up to be about 50 to 60 inland barges. But I will tell you that at 50 to 60 new construction orders, the present shipyard capacity that can build a high quality inland tank barge is full. If you wanted to build another barge beyond that 50 or 60, you’re well into 2026 to get delivery. So I think the capacity to build inland barges in the United States is diminished from what it was once upon a time when we saw the hyper-aggressive building during the days of chasing the shale crude barrel. So supply is as in check as I’ve ever seen it in my 28 years.”

“So I think when you compound all that or add all that together, you’ve got a supply side that looks as good as we’ve ever seen it, as I’ve ever seen it. And you’re clipping along at 75 barges retired in 2024. And if you take that 40, 41, 42-year old barge group as a group, I mean, you still got 500 plus barges that need to retire in the next five years. So I think when you bake all that together, supply size is in check as we’ve ever seen it.”

From Q3 2024 EC “And then with retirements, you’re seeing us going to retire some barges. I think the industry is going to retire a fair number of barges. So we may actually see from a supply standpoint, a net contraction in the number of barges out there.”

According to Kirby, around 47% of the inland tank barge fleet has to go through its COI (Certificate of Inspection) renewal, so there is probably going to be a good amount of barges being retired, further tightening the supply of tank barges as they come to the conclusion that these barges are not feasible to continue operations further setting up the super cycle and possibly lead to an accelerated replacement cycle.

The decrease in supply of barges obviously benefits Kirby as it increases the barge rates and since they are the largest operators, they have way more barges than smaller subscale operators. They benefit from that dynamic as well.

Another positive for the industry is that barge utilization rates are in the 90%+ range which should incentivize new construction in theory. On the dry side, Kirby mentions increased new construction for hopper barges in Q3 2024 “And so, I think there’s also a large number of hopper barges being built to replace on the dry cargo side of the business. Those hopper barges compete for the capacity for new construction with tank barges.”

The commentary on these earning calls of these industry players is very valuable and forward-looking. There is so much more I want to quote from Kirby’s and Arcosa’s ECs. I encourage everyone that’s interested to go listen to them as it perfectly explains the dynamics in play right now.

Cost of Construction

The biggest headwind right now is the price of steel as it is still elevated for barge operators to justify new construction. Labor costs are also higher with Conrad raising hourly labor rate to their workers in February 2024 to retain their workforce. That’s a whole other issue that will come by itself if the shipbuilding industry expands, the lack of workers.

Luckily with the incoming replacement demand coming from commercial customers mainly, they will have some protection if steel prices do move up, as they have provisions that protect them from that but not from escalations in other costs.

The big losses in 2022 and 2023 stem from the surge in steel prices during that period, affecting their fixed price contract with the Navy to build eight YRBM barges. Since then, steel prices have subsided and for the nine months ending FY24, they have been profitable generating ~7m in operating income. There is definitely uncertainty with steel prices and all the tariffs announcements that can be inflationary. The future on the cost side remains uncertain. But with better priced contracts moving forward and shipyard capacity likely full, they can focus on adding profitable backlog as they now have the pricing power.

Valuation

The company is currently trading at $60m market cap, with $3.25m in debt, and $37.45m in cash bringing the EV to $26m. Now, they generated $7m EBIT during the nine months, bringing run rate EBIT for the full year to $9m. This brings FY24 EV/EBIT 2.9x at the start of a super cycle.

In this cycle, the company should be able to at least replicate the prior 2010-2014 cycle. Prior peak they generated $30-$40m in EBIT, which should result in mid cycle EBIT to $15-$20m. However, I believe this is just the early stages of a super cycle and currently are generating $9m run rate EBIT. If we assume they generate prior peak EBIT at $30m, this brings mid cycle EBIT to $15m, only paying 1.7x EBIT. Peak EBIT would be less than 1x EBIT. Given the current dynamics, they should be able to surpass prior peaks as there is significant pent-up demand to replace the fleet, but steel and labor costs remain as headwinds in order activity. Despite this, they achieved the highest backlog in the company’s history at $310m.

At 6x mid cycle EBIT, we get a share price of $24.75. At a 10x multiple, we get a share price of $36.71. I believe 10x is appropriate as I believe this cycle will be long and way stronger than past cycles. I also believe I was very conservative in the mid-cycle EBIT numbers. If we assume they can operate without any significant forward losses moving forward and we back out the losses on the YRBM barges for the nine months FY24 then we get to a run rate EBIT number of $23m. Keep in mind this is during the start of a big replacement cycle coming, not the mid or peak. You start playing around with the model and backing out losses and you can see significantly more upside. I won’t factor that in the model to be conservative, but I don’t think that’s out of the picture and gives a sense to what we can see moving forward.

Conclusion

Conrad is trading at dirt cheap levels with a significant replacement cycle in front of them. The barge fleet is aging and there will be a lot of retirements of the fleet in the coming years, making the supply of barges even tighter than what it is today. Utilization rate for the operators is at 90% range which should incentivize them to replace the fleet and even expand as barge rates go higher. Any delays on the replacement cycle will just put a strain on the operators as delivery dates extend into 2026-2027, making them compete for capacity with other operators. Steel prices and labor cost remains a headwind, but operators probably cannot defer replacement for much longer.

RISKS

Tariffs affecting the transportation of commodities

Delays in the replacement cycle

Steel prices

Burnham Holdings

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Boring Boring Boilers

Burnham Holdings is the parent company of a family of boiler manufacturers. Among them you might recognize U.S. Boiler and Burnham. They also own Thermo Pride (furnaces), Thermal InMotion (rental boiler biz) and CSI Services (HVAC service). They enjoy strong brand recognition, allowing them to leverage their vast distribution network to introduce new products and gain faster product acceptance in the market. Currently, the family of boiler manufacturers have 33% market share for residential boilers (Annual Shareholders Meeting), highlighting its strong brand recognition and popularity among contractors. 75% of revenues come from Residential, while the remaining 25% comes from Commercial.

Burnham offers a compelling risk-reward opportunity, trading at 5x EBIT and at 62% of book value in a stable, growing industry driven by replacement demand which offsets any weakness in new construction demand.

Snapshot

Price: $13.6

Market Cap: $63m

EV: $84m

Shares Outstanding: 4.6m

Burnham operates in a stable, growing industry that is mainly driven by replacement demand. Revenues by segment are as follows: 70-75% is residential, while 25-30% is from commercial. 80-85% of revenues can be attributable to replacement demand while the remaining 15-20% is attributable to new construction. This is very attractive as any weakness caused by new construction is easily offset by replacement revenues. The average life of a boiler can be 15-20 years, in some cases even more. However, with high efficiency boilers taking the spotlight, these usually have a shorter life span which should accelerate the replacement cycle. The life of HVAC units has gone from 20 years in 2011 to 16.4 years in 2023.

We should see that with higher efficiency units, the average life should come down and increase the rate of the replacement cycle, resulting in consistent industry growth.

Currently we are seeing strong growth on the commercial side due to replacements of older, less efficient boilers. Commercial customers are more incentivized to save on operating costs than residential. The residential segment is experiencing weakness with the first two quarters posting YoY declines while the third quarter showed recovery, posting an increase in sales YoY.

The graph above shows the % of installed base replaced each year and the age of the HVAC equipment being replaced. It shows there is still a bunch of old equipment waiting to be replaced. Age of equipment is above trend while % of install based replaced below trend, highlighting the temporary weakness in 2022-2023. Additionally, the analysis done by bdools2 in VIC on his write up for Watsco he mentions “Assuming most systems replaced in any given year are 10-15 years old (some outliers outside of this) makes today’s core replacement cohort being units installed in 2008-2013, when shipment volumes were suppressed by the GFC housing crash. During those six years, 33.5 million AC and heat pump units were shipped. Since that time, annual shipments have steadily risen. Eventually we will be replacing the 2017-2022 cohort of shipments which amounts to 54.4m units. This is a volume increase of 62% between equal cohorts.” There are a lot of units that will be replaced in the coming years that were installed years ago. The construction boom post-GFC should start replacing in the next 3-6 years. He also mentions how the CEO of Watsco highlights the fact that replacement of HVAC systems is making more economic sense than repairing the systems. “Management has stated that the cost to repair has inflated more than the cost to replace, making it less economic to repair given the superior efficiency of new systems against old AC systems at a time when monthly budgets are tight and energy bills can be high. Contractors prefer and favor replacements in their advice to consumers, which makes it unlikely to see an extreme shift towards repairs.”

With Burnham having 33% of the boiler market in the US, they are well positioned to benefit from adoption of high efficiency boilers and electrification. Recently, they launched Ambient, which is their family of electric heating products. This includes an electric boiler, meeting demand for the decarbonization of buildings, and also a heat pump which has experienced significant growth over the years.

In 2023, the boiler market experienced a decline in units shipped as experienced by A.O. Smith, which owns Lochinvar, a competitor of Burnham’s boiler family. In contrast, in 2023 Burnham was able to grow when the industry declined, showing market share gains.

Production Capacity Expansion

In early 2024, Burnham expanded production capacity by building a 45,000 sq ft facility adjacent to their U.S. Boiler manufacturing facility in Lancaster. This was not disclosed by the company in quarterly or annual reports, so I am not sure many investors are aware of this, but they did it to expand production of their Alta boilers which is a best seller and accounts for roughly 75% of their high efficiency boiler sales in 2023.

We can imply that they will keep seeing strong demand and taking market share. This goes hand in hand with A.O. Smith facility expansion for their water heaters and boilers, as they expect further demand to materialize.

Borrowing Capacity Expansion

In the 2023 annual letter to shareholders, Chris Drew announced the expansion of borrowing capacity by 33% which is the first increase in their borrowing capacity since 2005. This should signal better times ahead, and demand that will end up materializing as the replacement cycle fastens. “Working with our banking partners we entered into a suite of new credit agreements that expand our borrowing capacity by 33%. This is the first increase in our credit facilities since 2005 and the increased capacity is available to support our continued growth and segment expansion.”

New CEO

Chris Drew had his first full year as CEO in 2023, where he was able to achieve record revenues and profits for Burnham. Chris has extensive knowledge of the industry and served as the chairman of the AHRI, which is the industry trade group.

New Construction

It is no secret that the housing market is in a pile of dirt right now, and with the future around tariffs uncertain, we just don’t know what will happen with housing. Considering that, it is very likely that Burnham is underearning as 15-20% of revenues come from new construction. They are showing great performance currently, but with a strong housing market the full earnings power should come out. Either way, in current conditions, you are buying the business for 3.8x EBITDA which is a bargain compared to comps.

Warranted, Burnham should probably trade at a discount, but the average of the peers come to 14.75x EBITDA, making BURCA’s current multiple illogical. It is a prime acquisition target, and I wonder if management is willing to sell at the right price.

The industry should continue to grow as people will continue to need to heat their homes up. The constant replacement cycle and current and future upgrading cycle to high efficiency systems makes it an attractive investment. Additionally, there are significant tailwinds if and when the housing market recovers where we will be seeing more housing starts and more existing home sales which should boost replacement of HVAC systems. Burnham is well positioned to continue grabbing market share as they shifted their focus to new product development throughout the years, ensuring they keep up with competition and also exceed them.

Valuation

At 4.4x 2024 EBIT and a current dividend yield of 6.8%, I consider BURCA a big bargain given its strong market share in residential, their vast distribution network, and contractor relations. In the coming years as the industry grows and the replacement cycle accelerates, Burnham is well positioned to grab market share. We are seeing early signs of preparations which include the facility expansion and also the borrowing capacity expansion.

I believe that a 10x EBIT multiple is fair for a company like Burnham. As mentioned before, they have a big market share in their respective market which warrants a higher multiple. Not to mention, the last few years performance has been very good and last FY broke record revenues and profits. With a 10x multiple we come up with a price of $31.43, which implies an upside of 131% or a 5-year CAGR of 19%.

Risks

Warmer weather

Competition

Slower replacement cycle

New Construction pivoting to Heat Pumps

Sources:

How Long Will My Boiler Last? | Temprite Climate Solutions

Shapiro Administration Invests $3.2 Million in U.S. Boiler Company’s Expansion, Creating and Retaining 132 Total Jobs in Central Pennsylvania – PA Department of Community & Economic Development

Moro Corp

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Non-discretionary underearning trading at dirt cheap multiples

Moro Corp (MRCR) currently offers a compelling investment opportunity at $2.10, trading at 2.8x EBIT with ample FCF generation, $0 debt, and a growing cash pile. It also offers downside protection with NCAV/share of $2.23.

Overview

Moro Corp owns 2 lines of business. They own construction material (J.M. Ahle + Whaling) and construction contract (Apollo Heating + Rondout) companies. The company was founded in 1999 by founder David Menard and acquired a couple companies, including the ones active today. Eventually, David Menard retired in 2019 and his son, Neil Kessler took over as Chairman. His son in law became President. In 2020, Neil became president and remained Chairman, while Ehud Israel became VP of Strategy. Since then, Neil has improved the company substantially and made some operational improvements that resulted in margin expansion, offsetting the decline in construction material segment revenues.

Snapshot

Price: $2.10

Market Cap: $12.9m

Shares Outstanding: 6.12m

EV: $6.25m

Construction Materials Segment

The construction materials segment has been on the decline in the past 10 years. It has been a drag in profitability as margins eroded alongside the decline in revenue. Basically, what they do is they fabricate rebar or reinforced steel, and sell it to contractors usually for roads, bridges, buildings, etc., any type of structure in NY metro areas, Eastern Pennsylvania, and New Jersey. It is a commodity business with no differentiation besides price and delivery time.

In the graph above we can see the deterioration in revenues from 2015- 2019, and then the bounce of the construction boom in 2020-2022. It has since then started to cool off as activity has slowed down. If I had to guess, management would eventually sell the division. It is hard to get to the operating margins at the division level, but I will guess it’s not very good and it’s a drag on profits.

Construction Contract Segment

The construction contract segment is basically all HVAC revenues. Apollo is one of the main players in the Capital Region of NY in the HVAC industry. They mainly focus on Residential New Construction (HVAC Install) and Retail (service and repair). HVAC companies are recession resistant as homeowner will always need someone to come repair their air or heat, it’s not something they just tell themselves that they will fix later. It’s a necessity. This is one of the main reasons PE firms go crazy over the industry. They also own Rondout which is an electrical service contractor, but information is limited for this company.

The division’s revenue is down from 10 years ago; however, they did sell some businesses that were part of that reporting segment. They also closed the commercial line of the business. I’m not sure how much commercial contributed to residential. I will be asking management.

Margins for the segment have been generally on an uptrend while HVAC revenues have been kind of all over the place. 2015-2019 were strong housing years. 2020 went to the dirt and then the quick rebound in 2021 from low rates gave company tailwinds and then normalized through 2023 and recently we are seeing an uptick towards 2024.

Capital Region

The HVAC business is highly tied up to the housing market especially since their service demand is driven by Residential New Construction (RNC). The capital region is one of the strongest regions in the state of NY in terms of population growth which is good generally for housing. The Regional Economic Development Council (REDC) has stated its goals for 2024-2028. One of the main goals are new housing units of 26,600. They also have net employment gain of 20,000 and net population gain of 30,000. “Between 2010 and 2020, the region added 26,498 housing units, an increase of 5.2 percent. Only the New York City region grew faster.” During the period of 2015-2019, we saw revenues rise consistently for HVAC.

Click to access REDC%20Strategic%20Plan%202023_High%20Rez.pdf

I believe this makes the case for the Capital Region being a place where housing will be strong when the industry rebounds. Considering Appolo Heating is one of the main players in the region, they will likely do fine.

Value of Appolo Heating

I did some research and HVAC service businesses are being sold at 6x-8x EBITDA usually, maybe more. I can’t get to the exact EBITDA margin from each segment, but the average is around 10% for HVACs but Appolo is well run as we can see from the margin expansion over the last 10 years so we can safely assume it’s more than 10%, but for the sake of it let’s call it 10% margin. On 2024E revenue, that is $3.7m in EBITDA. That brings us to an acquisition price of $22m-$29.7m. Keep in mind, the market cap is $12m. They acquired Appolo in 2006 for $3.3m.

One of their competitors in Albany, NY, was acquired in early 2024 by a PE firm, however the price is undisclosed. In November, that same competitor acquired another competitor in the region. That same company announced they are looking to acquire an electrical contracting service company to expand their service line, and guess what, Rondout is owned by Moro which could lead to a potential sale of that business.

Management Capital Allocation and Changes in Operating Performance

I believe Neil Kessler has been behind the operating improvement of the company, including margin improvements at the operating level. One small example is advertising expenses. Advertising expense pre-Neil Kessler was around $500-$600k a year, it has now been cut down to around $150k/year. It seems small but just the principle of cutting costs even that small outlines his philosophy of every dollar counts.

Neil has taken the initiative to wind down operations and sell underperforming businesses. In 2022, he closed Titchener and sold J&J Sheet Metal Work. They also closed down the commercial line on the HVAC business. The reason he sold them, in his own words “The first action was the previously reported shutdown, earlier this year, of operations at its Titchener Iron Works subsidiary in Binghamton, NY, whose business was to fabricate and install stairs and railings. Since being acquired by Moro in 2010, Titchener had consistently poor performance. In addition, weak economic conditions in Titchener’s markets made the decision to close it down the best option.”

On J&J “Another recent change was the sale of Moro’s subsidiary, J&J Sheet Metal Works, LLC, located in Vestal, NY, to a partnership including J&J’s former president, who had approached Moro about the sale. Moro carefully weighed a number of factors and decided that the transaction would be a strategically advantageous way to enhance Moro’s operating results.”

On the commercial line of Appolo “The last recent strategic change at Moro was to exit from the commercial HVAC line of business operating at its Appolo Heating, Inc. subsidiary in Schenectady, NY. The line’s profitability was always limited, and it was facing continued, challenging market conditions. Management made the decision that concentrating resources in the other two lines of Appolo’s business could improve Moro’s overall operating results.”

I think his initiative of closing down underperforming businesses shows good capital allocation skills.

This is the company’s cash balance at the end of year. I expect at FY24 cash will reach around $8m vs a market cap of $12m or 66% of the market cap. They have $0 debt and do not need to use any type of debt to fund operations. The business does not require much cash either, which leads me to my next question.

What will management do with a growing cash pile? The most obvious answer is either buybacks or a special dividend. Even going private might be a good option if they offer shareholders a good price. However, the company has never paid a dividend which is beyond me considering the amount of cash they generate.

The company has grown book value consistently over the last 10 years, growing 157% over the time period and at a 9.9% CAGR. I’m confident it will keep on growing under the current management team.

Valuation

Moro is trading at 2.8x EBIT, a 35.2% yield with ample FCF generation and a growing cash balance. We have downside protection based on NCAV. Current NCAV/share is $2.23 while the stock price stands at $2.10, not a massive discount but still significant. The current price is a steal considering the value of Appolo, and on top of that, Apollo is underearning due to weakness in the housing market.

The company is a better business now than what it was before, and I think that is partly due to the new management team which is essentially Neil and Ehud. The company has gone from millions in debt to virtually $0 debt and ample FCF generation, growing the cash pile. Margins have improved throughout the years due to management disposing of weak-performing businesses and cost-cutting/price increases, and I expect that to continue.

PhoneX Holdings

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Write Up

Quick Pitch

PXHI is trading at $1.09. I think it is a buy because:

It trades at a cheap multiple of <4x EBIT my 2025 estimates providing us a 25% pre-tax earnings yield
They earn high returns on capital because they are able to turn their inventory quickly, 17x in 2023
They are one of the biggest wholesalers of second-hand phones in the US, data driven, with an extensive buyer network and already scaled, providing some degree of barriers to entry.
It can grow at 10% with industry (until 2027), and in years that inventory is widely available, they can grow at a much faster rate than industry.
Favorable industry tailwinds where demand far exceeds supply. (double edged sword)
They have $0 debt and are buying back shares.

The stock is trading at $1.09, I think it’s worth $2.65. Here is why I think it is worth that; It’s trading at a very low multiple (3.7x EBIT) relative to its growth. I think the company can grow at 10%+ for a couple of years due to strong industry tailwinds with secondary hand phones gaining market share over new phones, and a supply and demand imbalance where demand far exceeds supply. It is an opportunity and a challenge.

They are able to turn inventory like Warren Buffett is able to turn over rocks. Last FY they turned their inventory 17x, resulting in high returns on capital. There is some degree of barriers to entry with scale being extremely important, they can buy directly from carriers allowing them to get the best value out of each phone (only a select few wholesalers are able to buy at the volume they buy), and also have an extensive buyer network instilled in its platform that provides advanced analytics and gives them an informational edge in pricing and velocity. It is tough to start from zero and replicate this, especially in such a competitive industry.

Lastly, they have $0 debt, and management is buying back stock when they have the chance. They have a huge cash balance that serves as a pillow in the case they have to withstand a temporary fall.

PhoneX Holdings

Price: $1.09

Shares Outstanding: 36.22m

Market Cap: $39.5m

Cash: $7m

Debt: $0

EV: $32.5m

Business Overview

PhoneX is in the pre-used mobile device industry. They operate in two models: Trading and Software. The Trading business is the majority of sales, basically just buying wholesale from carriers and big box retailers, cleaning and data wiping the devices, grading them, and finally selling it to resellers. The software business is still being built, and revenues are not disclosed yet. I will not be talking about the software business.

Industry Overview

The industry for secondary phones is relatively new. Before 2014, the industry was not big at all and that was due to basically no supply. Consumers bought new phones, and their old phones were saved in a cabinet inside their house or ended up in landfills. By the end of 2014 and beginning of 2015, the market took a sharp turn and started to form as the carriers began promoting trade-in to attract new customers and retain them in their subscription. This is when a lot of secondhand phones started to circulate, and carriers started taking advantage of the phone’s residual values. The organized secondary market started to form. PhoneX was at that time called “Usell” and it was a platform where consumers sold their old devices for cash. That business model started to decline once the carrier entered the market with their trade-in promo.

They acquired We Sell Cellular in 2015 to deal directly with the carriers, buy in bulk and sell in bulk. However, they were capital constrained. There was a lot of demand for secondhand devices all over the world, but they couldn’t buy more inventory, they didn’t have enough capital. So, they raised money through debt, and they started increasing those inventory levels and revenues expanded at a fast rate as trade-in volumes gained more traction at the carriers. They quickly became one of the few wholesalers that could buy at the volume required to buy directly with carriers, which put them at a cost advantage relative to smaller players.

Today, the industry is a lot more competitive with low margins where in order to survive you have to get your hands on inventory (very hard) and turn it over fast. They have access to supply through the carrier’s trade-in programs. To this day, they are one of the top wholesalers in the industry with an online platform, making it easy to buy in bulk and giving customers the ability to select the devices they want, instead of buying boxes of phones with multiple models that they may not need.

PhoneX’s ability to turn over inventory quickly is impressive. That can be attributed to 2 things; an extensive buyer network (no customer accounts for more than 10% of sales) and supply and demand imbalance, where demand far exceeds supply. This has been the case for a couple years now.

The only limiting factor for their growth is getting their hands on inventory. Most of the phones they sell are iPhones, and it just dominates the secondary market. They recently started expanding into Samsung devices, which brings in healthy demand, however it is mostly iPhone. Supply is principally driven by trade-in volumes, that is, phones traded in with carriers, retailers, etc. If an iPhone launch is weak, so will be the sales for PhoneX as they won’t be able to fulfill demand and margins are going to get squeezed as low supply will cause prices to increase, coupled with increased competition. It is kind of a double-edged sword because if trade-in volumes do well, then there will be more competition driving down margins as well. This was seen in 2023, where margins were affected by increased competition, whereas in 2024 the problem was the weak launch of the iPhone 15 that resulted in low trade-in volumes coupled with increased competition which affected PhoneX’s sales, however, they were able to improve margins.

Q4 and 2023 Mobile Trade-In and Upgrade Industry Trends Report

Trade-in volumes have increased substantially over the past couple of years fueled by iPhone releases and continued heavy promotion for trade-in programs from the carriers. As long as this trend keeps growing, which it likely will as it has become the norm when buying new phones, PhoneX will do well because they are dominant in the industry and have the scale and connections, providing some degree of barriers to entry.

PhoneX is able to turn over inventory like crazy. Again, the only thing stopping them from growing is supply, if they can get their hands on more phones, they will grow at a healthy rate. This is why it is so essential for the iPhone releases to be successful; it will flood the secondary market with supply of older phones, which PhoneX will sell very fast.

Short-term Catalysts

iPhone 16 successful launch with Apple Intelligence

As I mentioned before, trade-in volumes fuel the industry growth. The more trade-ins, the more supply, the more they can sell. Early trade-in volumes captured by “sellcell.com” indicate a 28% trade-in volume growth from prior launch. Additionally, in the Q3 report, the CEO mentioned “management is optimistic that the new iPhone release cycle will drive meaningful economics for the Company in Q4 and in Q1 2025 as consumer excitement around AI capabilities motivates a significant number of consumers to replace older generation devices. Early indications in Q4 suggest that volume will be robust at least in the near term.” All signals point into a strong 2025 with higher trade-in volumes.

Long Term Catalyst

Continued secondary phone market growth

There are many websites and forecasts saying different things but all of them point towards a growing market. IDC mentioned 10% CAGR from 2022-2027. Consumers are wanting cheaper alternatives of the same quality. The answer to that? Pre-used devices or refurbished. It’s just so much cheaper and basically you get the same value.

Consider this, “Used smartphones are now 21% of the total market, compared to just 4% in 2014. 309m were sold last year, versus 1.1bn new smartphones” Used smartphones take 21% of global smartphone sales; Samsung declines as middle market disappears – Chemicals and the Economy.

Used smartphones are becoming more of a mainstream buy. Why waste all that money on a new phone that is the same as an older phone? It’s a complex industry dynamic because we can’t have everyone buying used phones because if not enough people buy new ones, the secondary market will not have supply for those seeking to buy pre-used. We need a perfect balance of new phone buyers and pre-used buyers. I don’t see the industry slowing down any time soon.

Valuation

The company is significantly undervalued considering it is trading at my estimate of 3.8x EBIT, growing 20% YoY with favorable industry dynamics. They are buying back shares and positioning the company to be successful in any environment. Their ability to turn inventory quickly allows them to spit out cash every year with minimal capex, leaving substantial cash for shareholders.

Since 2018, the company has grown at a CAGR of 21.5%. Over this period, the nascent industry became an organized, mature industry. Industry is forecasted to grow at a 10% CAGR until 2027. I believe PXHI will be able to grow at a higher rate, making the 10% growth conservative. However, due to uncertainty with the European market, a 10% seems reasonable.

Worldwide Market for Used Smartphones Is Forecast to Surpass 430 Million Units with a Market Value of $109.7 Billion in 2027, According to IDC

Risks

Average age of smartphones

The average age of used smartphones keeps increasing YoY posing a risk, or rather an inconvenience for PXHI. The longer consumers hold onto their phones the less frequent trade-ins. We want continuous movement in trade-ins to keep the secondary market flowing smoothly. At this rate, the best-selling pre-used phone will be three generations behind the new phones. For example, since the iPhone 16 is out now, the best-selling device right now, or the one with the most supply is the iPhone 13. This will carry on to the next risk.

Europe’s USB-C standardization

The European Union stated that every phone that is imported has to have USB-C, otherwise it is illegal. This took effect on December 28, 2024. Europe is one of the biggest importers of secondhand phones in the world, so this would likely have an impact on PXHI, or maybe not. This is a risk I am pretty uncertain of in terms of how it will affect a wholesaler in the US like We Sell Cellular, but considering Europe is one of the main importers, even if they don’t sell directly there, some of their customers do. The market in Europe will be a mess probably until iPhone 18, or 2 more years as by that time, the iPhone 15 which is the earliest iPhone with USB-C will be the one with the most supply, unless iPhone 16 and 17 become big hits.

Apple taking action

Lastly, with secondhand iPhones taking share over new iPhones sold, if it escalates into a bigger share that becomes a problem to Apple, they will likely try to kill the secondary market. How? I do not know but they have the power and resources to. Maybe they will actually expand their trade-in program and scale their refurbishing operations to sell DTC.

National Stock Yards Company

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Reading the footnotes, a Special Situation.

National Stock Yards Company

Price: $319

Market Cap: $13.9m

Shares Outstanding: 43,612

National Stock Yards Company (NSYC) owns and operates the Oklahoma National Stock Yard and the St. Louis National Stock Yard (no longer operational, just land). NSYC owns 102 acres of land right outside Oklahoma City and 75 acres right outside downtown St. Louis, Missouri.

The company’s stock yard in Oklahoma has been deteriorating, where they were doing ~1m cows a couple years ago, and today they are getting a measly ~300k cows. It’s doing poorly and profitability has deteriorated. In early 2024, the state wanted to build a prison, and among the considered land for construction was NSYC’s land. However, the chairman, Chris Bakwin, great-grandson of the founder, did not want to sell the land and said it would hurt the economy in that area as they mentioned around $1B flows through the stockyard and employ a couple 100 people. There was concern the government was going to acquire the land through eminent domain. The government eventually decided it was going to be built somewhere else and the NSYC land remained intact.

Fast forward to October/November, in Q3 2024 report, in the footnotes, they mentioned the following “In October 2024, the Company’s Board of Directors began to explore alternative options for the Oklahoma City operations by entering into an agreement with a real estate broker. This agreement allows the broker to market the approximately 100 acres of land comprising the Oklahoma National Stock Yards property. This agreement runs through April 30, 2025.”

Yes, they are now willing to sell the property, and it looks like the market does not even care. The price tag on the property is $27,000,000. Almost double the market cap.

Oklahoma National Stockyards | Levy Strange Beffort

“We are getting tons of interest, and most of our efforts are really talking to people in Oklahoma, which is where we want new ownership to land,” Rice said.

“Rice said the listing was made in October, and there have been offers, but they are letting things settle to vet potential buyers. He said most interest has been from investors who want to keep the stockyards intact.” These came from a news outlet in Oklahoma, where the brokers are saying there has been plenty of interest on the property. However, they want to sell it to a local that will keep the legacy of the property intact so they will have to select the buyer. That’s a good position to be in when you can select the buyer. However, it may come at the expense of rejecting a higher offer by a non-local investor.

There is also one more thing that just makes me feel confident that we will make money on this investment, and it is the words from the chairman of the company. “Bakwin said as board chair for the company, his primary obligation is to its shareholders. “It’s gut-wrenching to unlink my family from this industry we essentially built,” Bakwin said. “It’s an emotional issue for me personally, but I can’t put my personal feelings above the interests of the owners of the company.”

Oklahoma National Stockyards is now for sale | KOSU

Investors want the property to be sold, and the Chairman is doing just that. Bakwin owns 10% of the company.

St. Louis Real Estate

They own 75 acres just outside of St. Louis in what used to be a stock yard. The business did not work out and the village there became a ghost town basically. The main building burnt down in the 1980s and the value of the building got written down to realizable value back then. Fast forward to today, they are marketing the property and have sold multiple parcels at very attractive prices. Below is a rough model of the value of the property based on past purchases.

I have it valued at $4,570,326 based on the average selling price per acre in the two parcels sold in 2020 and 2021. The current carrying value of that land in the books is $2.15m, and the footnotes explicitly say “St. Louis Real Estate Development Management estimates that the fair value of the Company’s St. Louis real estate is in excess of it carrying value and demolition costs, and accordingly, the carrying value of the St. Louis real estate has not been adjusted. However, the amounts the Company will ultimately realize from the sale or development of this property could differ materially from management’s current estimate.” I feel pretty confident with my estimated value of the remaining 75 acres of the St. Louis Real Estate. It’s only 2 miles away from downtown.

With that said, the risk/reward is pretty awesome. I think this is a case of heads I win; tails I don’t lose much. I have a range of estimated returns that are very compelling considering the short amount of time these returns are going to be realized in.

I’m not great with tax, but I know capital gains tax, especially LT, is taxed at 0%, 15%, or 20%. Not sure how much they’ll have to pay so my estimate might be a bit defective in that sense. Oklahoma capital gains tax is capped at 4.75%-4.95% and can be 100% deductible. Regardless of the tax rate, I think this is a very attractive opportunity and it was presented due to market inefficiencies of either people not reading the footnotes, or because the company is more than 100 years old and so small no one follows it, but nonetheless we are here to make money.

* It is worth noting that the public float is currently 2% which totals to 872 shares. Very thinly traded.

Gee Group

2 Replies

GEE GROUP WRITE UP 11/14/2024

Gee Group (JOB) currently presents a compelling opportunity at $0.26/share with industry sentiment at its lowest and a beaten stock price to levels where it does not justify current forward valuation. It is also worth noting it is trading slightly below tangible book value and sitting on a stash of cash with 70% of its market cap in cash.

Company Overview

Gee Group is a temporary staffing (87.3%) and direct placement (12.3%) agency based in the US. GEE operates in three segments: Industrial staffing, Professional staffing, and Direct Placement. The company targets multiple verticals including IT, Accounting and Finance, Medical Scribes, Light Industrial (blue collar), and Engineering. The company has become relevant in the past 10 years as they started growing through acquisitions when Derek Dewan, the CEO, took charge in 2015. At that time, GEE and Scribe (where Dewan was the CEO) merged and became GEE Group. Ever since then, the company has grown through acquisitions in the fragmented industry of temporary staffing. As reference, in 2015 the company had $43m in revenues and in 2023 it was at $152m.

Snapshot:

Price: $0.26

Market Cap: $28m

EV: $8.4m

Shares Outstanding: 110m

Why does the opportunity exist?

Besides being a very small company with zero analyst coverage, the industry is not very hot right now. The staffing industry is highly cyclical and tied with economic activity.

Gee Group has been losing money during the downturn and recently got hit with a big goodwill impairment charge of $20m, the stock is down 55% from a year ago. Investors also seem to not like their new capital allocation strategy which is to fuel growth via organic growth and acquisitions.

With the past 2 years with horrible performance and very ugly industry dynamics, this might be a pass for anyone that looks at it on a surface level. However, if we take a closer look, we find out the high operating leverage of the business and capital light nature that allows for high FCF generation. With significant cost improvements and emphasis on operating efficiency, GEE Group is poised for strong outperformance when the cycle turns.

On a high level, the labor market recently started to loosen up, coming from high inflation down to tamed inflation with high interest rates which led businesses across the US and all over the world to lay off a ton of workers and employ hiring freezes. This led the unemployment rate to rise to around 4.1%.

Temp staff is the first one to get hit when the economy slows down. Due to the nature and flexibility of temp staffing, they are the ones that get fired first during a downturn, and the first ones to get hired when activity increases. This is a key reason why companies use staffing agencies. The staffing agency bears the risk of employing the person and they just charge a markup on their wage to the client company. So the client company bears no employment risk, has no responsibility, and can fire the worker whenever they want.

The temp staff penetration rate (temporary workers/employment) has averaged around 1.9% in normal environments and 2% in very good environments. Currently the penetration rate is sitting at 1.68%, significantly below trend.

Catalysts

Penetration rate reverses to the mean

The penetration rate has been going on an upward trend as companies use temp staffing more and more due to the flexibility it provides and the desire of a more variable cost structure. I think this is highly likely as this is basically believing in the US economy which is the world’s powerhouse. From 1.68% to 1.9% is an increase of 13% and there are high correlations between penetration rate growth and the industry’s revenue growth.

Unfortunately, I did not have access to a longer time frame, but I think this frames the picture pretty well. Usually, industry grows above the growth in penetration rate, so we can see a bigger increase than 13% in industry growth when penetration rate reaches 1.9% again.

Accretive Acquisitions

This is a controversial take as investors only want buybacks and dividends, but I do believe they will benefit greatly today with acquisitions due to the market environment. They will be able to get more attractive valuations at cheaper multiples and it could be very accretive to earnings. Here is CEOs reply to a question in their latest earnings call (Q3 2024) regarding what they define as an accretive acquisition:

“Yes. Accretive acquisitions, in our mind, are acquisitions that would be profitable from the get go or at the most a very, very short time after the acquisition, and would add to our earnings per share, and to our EBITDA.”

In a fragmented industry like the staffing industry, acquisitions are necessary to fuel growth. There are over 25,000 staffing agencies in the US, most of them are small regional local firms. Gee Group is trying to become more of a national firm by scaling through integration of acquisitions. I think this is the best capital allocation policy currently.

Also worth noting that they could become an acquisition target. The CEOs past company, MPS group, was sold to Adecco for $1B+ back in 2009.

Management also mentioned that they have received offers to be acquired:

“And the answer is we get inquiries from time-to-time, most recently two days ago, as to a potential, a merger or strategic acquisition, going the other way to enhance someone else’s growth strategy and make us a part of it. All of those will be looked at and brought to the directors to review in conjunction with senior management, when and if those opportunities become meaningful.

But at this point, we believe we’re undervalued in any type of transaction like that may not be beneficial in the longer run, but of course that’s a decision that is not unilaterally made by anybody company.”

Reinstatement of buybacks

About a year ago the company incorporated a buyback program due to increased pressure from activist fund Red Oak Partners. The company made an agreement with Red Oak Partners that will improve corporate governance with the PM of Red Oak sitting in the BOD and one of his nominations as well. However, the buyback expired in December 2023 and was replaced with the acquisition capital allocation, receiving criticism from shareholders.

Valuation

I believe the company is currently trading at 1.8x my normal EBIT estimates. That is sheer undervaluation. I believe they will be able to come back stronger due to the intensity of the fall of the penetration rate and based on comments from CEOs in the industry, there are a lot of projects that were deferred due to the state of the economy and the uncertainty. These projects will have to be done sooner or later and especially in the IT segment, they will benefit greatly from this pent-up demand. Pre covid EBIT hovered at around $3.15m, I believe they can do $4.7m EBIT in a normal environment. At its peak when labor markets were booming, their EBIT went as high as $9m.

At a normal 10x EBIT multiple gives us an upside of 134%.

The margin of safety is relatively high as the company’s current TBV/share is $0.22 vs the current share price of $0.26.

*This valuation is not inclusive of the potential accretion to earnings from future acquisitions, which are expected to happen in FY25. I also caught myself being too conservative in my revenue estimates as they likely will grow at a higher rate than the industry given acquisitions and organic growth.

Risks

Overpaying for acquisition

Self-explanatory, any bad acquisition whether it’s overpaying or using too much debt can reduce the value of the company. In the past they have run into problems with over leveraging. They did that with SNI which almost took the company bankrupt. However, they were able to raise capital and pay everything off and start off from a clean slate at the expense of shareholders. However, it was necessary but would have been preventable. Goob392 at VIC outlines this situation very well.

Timing

The timing of the cycle could take longer than expected. There is a possibility that things can get worse from here.

Greystone Logistics

Boring Company, Exciting Future

Greystone Logistics is a tiny nanocap company trading at 7.8x my 2024 estimated earnings and at a LTM 12% FCF yield and going forward up to 20% yield as growth capex decreases with decent growth prospects and a highly motivated CEO with high insider ownership. Greystone designs, manufactures, and sells recycled plastic pallets to big corporations and distributors in the pharmaceutical, food, beverage, automotive, and retail industries. Some of their notable customers include iGPS( largest plastic pallet leasing company), Walmart, Molson Coors, Berry Plastics, etc. Some of these customers reach out to Greystone for customized pallets specific to their industry and their needs. For example, Walmart signed a 3-year contract with Greystone and they asked them if they could redesign their pallets for them with specific handles for better ergonomics. They have the scale and capacity to do these at a lower cost than competitors. They are now expanding into extruded lines for odd sized pallets.

Greystone is the lowest cost producer thanks to their vertical integration and capacity. They are vertically integrated by recycling and BBing plastics themselves. To a competitor that might buy processed plastics it can come in at $0.20/pound, but for Greystone, it comes way cheaper than that because they do it themselves. So, what they do is they buy it unprocessed for cheaper and then they BB the plastic and make the pallets. You can also attribute this recent change to the increase in margins and explains the fact on why I am confident they can go above 20% margins as volumes increase. Another interesting fact is a new agreement with Berry Plastics. They are now taking their plastics and recycling it and making new plastics for them. I assume it is still a small operation as the relationship still has to grow, but over time, I expect it to become bigger. Special thing with Greystone is that they can to a certain extent control raw material costs.

The plastic pallet industry is very interesting actually. They compete with the wooden pallet industry, and it has been a fierce competition. The wooden guys talk trash on the plastic guys and the plastic guys talk trash about the wooden guys. Now this dispute goes on because wood has basically all of the market share of the pallet industry because it’s cheaper and they don’t want their market share taken away. Wooden pallets are 10x more used than plastic pallets due to their lower cost. However, the plastic pallet total cost far outweighs the wooden pallet total cost. Let’s start with the initial price, yes wood is cheaper initially, but it also lasts way less. Greystone pallets last 7x more than a wooden pallet which drives the total cost down because when that wooden pallet breaks, you have to use another one or fix that one and it’s going to cost you. Second, the plastic pallet is cleaner. Unlike wood, plastic does not absorb any liquid and does not rot which makes it perfect for the food and pharmaceutical industries which are regulated industries when it comes to sanitation and hygiene. Third, plastic pallets are safer. They don’t have nails or wood splints that come out and can harm people and the product. Finally, they are lighter. Saves you money on fuel and transportation costs. They are around 30% lighter than wood.

I believe plastic pallets will end up taking more market share from the wood industry slowly as ESG becomes more important for companies and efficiency, along with automation, is essential to reduce costs in a competitive environment. Greystone is well positioned with heavy capacity and an opportunistic management to take on the shift from wood to plastic pallets.

The thesis’s main driver is sales. The company made some purchases on extrusion lines with the acquisition of Paradigm Plastic Pallets and a couple of tonnage injection machines that have to be filled. Right now, they are sitting down on some empty equipment and Warren said these empty equipment should generate additional revenue to get to the $100m revenue mark. Now some of you may think, “How do you know this equipment will be filled?”.

Well, there are various factors. First the shift from wood to plastic will bring additional revenue over time to Greystone and as they are one of the industry leaders and lowest cost producers, they will be the main choice. They don’t have a lot of competition. There are only half a dozen competitors of size that compete with Greystone and even with that, only 2 compete directly. While others have more resources and are bigger, they don’t focus solely on pallets, they manufacture other products, so they don’t compete in price with Greystone. Also, in addition to growth with iGPS, as iGPS grows so will Greystone. They have the manufacturing capacity and relationships to fill that equipment. I already mentioned iGPS, but Walmart will also be an important customer in the coming years. They just signed a 3-year deal with them but that is only in one distribution center. Walmart has 210 distribution centers. I believe they will expand into more Walmart DCs over time as the need for plastic pallets increases with automation needs. Some auto customers as well in talks. In general, they have a huge pipeline of opportunities in the coming years. Warren Kruger stated “I will say I’ve never had as much in our pipeline in terms of sales opportunity since in the last 20 years. It’s very encouraging. My belief and what I’ve told our folks is, we’ve got to fill, we’ve got to get to that $100 million mark, and the only way to do that is fill equipment.” This optimism from the CEO is encouraging and I do believe they will be able to achieve this milestone.

Second reason why I believe they will achieve that revenue mark is because the CEO knows what he is doing and is very motivated. He has plenty of skin in the game owning more than 30% of the company and has been operating it since 2003. He has extensive relationships in the industry that helps form business relationships, and that is an underrated asset to have as a CEO.

Third reason is the expansion of the sales team. They have hired 2 additional salespeople. Those people have brought in relationships to the table. One of them brought Walmart while the other brought relationships at Honda, Bery Plastics, Toyota, etc.

Now, let’s talk about financials and valuation. Greystone has $4m in cash and $13m debt. Not worried at all about debt levels, they mentioned that their focus is paying down debt aggressively and they are a FCF machine. They spit out cash every year. Now that growth capex stabilized from an investment of around $10m in equipment in 2023, we should see capex go down. I expect around $2.7m in capex ending 2024 and similar in 2025 as they invested on equipment to expand capacity and now, they have to fill that equipment. I estimate maintenance capex to be in the range of $3m. As cash flow grows with a decrease in capex, debt can be paid down. A $1m buyback was announced on an earnings call. Management is very opportunistic with buybacks. I expect 20% margins moving forward based on management statements and vertical integration with the BBs of their own plastics.

Greystone is currently trading at a P/E of 9 TTM. Based on my 2024 estimates, it is trading at 7.8x and in 2025 5.8x. On an EV/EBITDA basis, it is trading at 4.47x (normalized, had abnormal gains in 2023), based on 2024 estimates trading at 3.3x and 2025 3x. I believe these estimates are very conservative and for 2025 included the lower range guidance from the extrusion business that will come out this June. I believe Greystone is in my opinion, significantly undervalued.

Perma Pipe International

Overlooked Growth

Overview

Perma Pipe International is a manufacturer of highly engineered piping systems and cable leak systems that are used in many industries including Oil and Gas, District Cooling and Heating, etc. They have operations in North America, Middle East, and Africa. Specifically, they have facilities in the US, Canada, Saudi Arabia, UAE, Qatar, and Egypt. The nature of the business is such that it is dependent on economic conditions on each of the operating countries and geopolitical conditions as they have a big operation in the Middle East and Africa. A large portion of their revenue comes from Oil and Gas customers, so when oil prices are depressed, so is their business as their customers reduce capital spending. They also serve the district cooling and heating market, which depends on infrastructure spending. For example, a big catalyst for Perma Pipe is the continued investment into Saudi Arabia’s infrastructure spending plan for 2030. Perma Pipe’s competitive advantage is in their history of experience and comprehensive product line, and their ability to custom the pipes to the customers requirement instead of just supplying the pipe. Perma Pipe has years and years of experience and has gained trust from its customers, and they have participated in the largest piping systems installed in the world. (India). Perma Pipe also has its locations strategically located close to their customers as they claim that having the facilities as close as possible from their customers becomes an advantage. This makes sense for their Oil and Gas customers. For example, they relocated their UAE facility to Abu Dhabi because it was closer to their Oil and Gas customers.

Expansion and Growth

Perma Pipe was previously named MFRI Inc. They were not only in the piping business but also were in the filtrations business. However, in 2016 this business was sold, and a lot of organizational changes started to take place when the current CEO, David J. Mansfield took over the company. A turnaround plan commenced when David took the helm as he saw the piping business had potential to grow, so they decided to focus solely on the piping business. As soon as he came in, he implemented changes in the Middle East, replacing the former management team because they were not following corporate policy as they were supposed to. You could say the MENA region was mismanaged until he took charge. Since then, margins have expanded as the CEO took cost-saving initiatives, reducing unnecessary overhead. This has caused gross margins to grow from 21.8% in 2015 to 27% in 2023 on $24m revenue growth. It is also worth mentioning that operations have been improving consistently since David took charge, especially with expansions in the Middle East.

Since his appointment, the company has initiated expansion into Qatar where they were able to be introduced to the Tawteen Program, opened a new facility in Canada, relocated a facility to Abu Dhabi, and initiated a JV with GIG to penetrate into the district cooling market in Saudi Arabia in support of their 2030 development plan.

In the last FY, backlog has nearly doubled going from $39.5m at the beginning of the year to $73m at Q3 of FY23. I believe this backlog will be realized to tremendous growth in the coming FY and I expect revenue levels to remain consistent due to oil prices and continued infrastructure spending in the Middle East. Perma Pipe is a market leader, especially in these Middle Eastern countries where they have scale in comparison to smaller players and a good management team at the helm.

The initiated expansion to Qatar has helped the company enter the Tawteen Program, which will help them break into the Qatar 2030 national vision and the QatarEnergy expansion of its LNG production capacity from 77m mtpa to 126m mtpa by 2026. The Tawteen program was designed to establish competitive in-country suppliers to serve the Qatari energy market, to fulfill the 2030 national vision, and to expand Qatar outside of the energy market. All of these middle east countries have one thing in common, they want to spend like crazy to expand their economy. Perma Pipe is well positioned to grab a share of that spending for its business units.

The opening of the new Canadian facility will help Perma Pipe serve the eastern Canada market. Brings them closer to current and prospective customers. Plenty of production capacity in Canada.

The relocation of the facility to Abu Dhabi in U.A.E will help Perma Pipe move closer to customers and will serve as a logistical advantage to its Oil and Gas customers. The facility is 6 hectares, it is big. This facility is going to be able to fulfill the growing demand in the Middle East and Africa, in both the oil and gas industry and the district cooling market. This positions them at the forefront of clean energy, with vast production capacity to serve those sectors and the proposed capital spending these Middle Eastern countries are aspiring to make.

The continued expansion into Saudi Arabia stems from the country’s ambitious $1T+ spending program. Perma Pipe partnered with GIG to form a JV to grab a share of that spending. They also outlined that the JV will result in expansion to Kuwait and Bahrain. The GIG JV will target mainly the district cooling market as the demand for cleaner energy grows, and the use of central plants in the Middle East increases.

Perma Pipe is well positioned to increase its revenues mainly from the Middle East. The capital spendings for these countries are substantial and Perma Pipe has the capacity and market recognition to help realize those goals. Not only do they have capacity, but they also have relationships in all these countries where it might make it harder for foreign players to enter the market and take market share. In these countries, relationships are important. These expansions will help the company increase its output and reach economies of scale and improve margins. They have nearly doubled their backlog over the past 3 quarters, and I expect continued growth as the markets in these countries expand as spending continues in an upward trend. I believe Perma Pipe is an attractive investment due to its current valuation. The company is very small at a current market cap of $63m, trading at 5x EV/EBITDA with tailwinds consisting of Middle East expansion, district cooling systems market expansion, and a growing backlog. And what’s best is that there is zero analyst coverage and the last article published about this company on Seeking Alpha was in 2014 and in VIC was in 2017.

Salmonwriter

My investing journal

Author Archives: Suriel Hector

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Overlooked Growth