Monday, February 25, 2008

Aaaaaah where are we heading?

Nothing has changed in my view of the ecnomy and stock market. Therefore I haven’t seen the need to write a new blog entry. Credit policies have been weekened during the past 20 years. Risk management has been surplanted by sales programs espoused by management consultants. Credit has been sacrificed for sales and the sales culture has been justified by unrealistic loss expectations. Ergo, we are in a period of shrinking credit to save capital which leads to a slow economy. The lending multiplier is dead for the near term.

Until the rest of the world stalls like the USA, we are going to face continuing, increasing, inflation in raw materials and pass through to all goods. Growing inflation will lead to higher bond rates and gold prices. Stagflation is unavoidable. The banks have hampered the economy and the weak dollar and thriving foreign economies have caused inflation to march forward.

I’ve continued to lighten equity positions on any rally and will be severely harmed if the market rallies and I’m wrong. But, like Charles Barkley, I don’t think I am. So, I continue to bet against the market, buy short term bonds, and bear market long bond ETFs. I’ve also been buying some munis.The place not to be is in the equity market. It smells like before the tech bubble burst and people knew it didn’t make sense, but it still went upward. This time the credit markets seem in terrible disarray, but everyone still believes the stock market is the place to be. I’m betting they are wrong. When banks don’t lend the economy sinks. When the econmy sinks you don’t want to be in stocks. With stagflation you also don’t want to be in bonds so you need to either stay short in duration or benefit from rising rates through TIPS , bear market ETFs, gold ownership, or short equity bets.

I may be wrong, but I feel a lot like Bernard Beruch and I hope I do as well as he did.

Wednesday, February 6, 2008

Should be a double from here

This position that started out as a MLM hedge and grew into a love affair that hasn’t been kind to me financially.Its price was in a tailspin and reached a low of about $2 in early January. Since that time it has recovered to about $4 and performed better than the other heavy building materials providers, convincing me that others have recognized that the selloff was overly enthusiastic in the face of declining homebuilding. Now, can it stabilize and move upward?

I think it can and should. The recession will affect the company and a 20% impact would take EBITDA down to 60MM. Of that amount, debt service isn’t large and fixed asset replacement isn’t as rapid if the mixer trucks aren’t running as much so they will through off free cashflow. The CFO says it will be north of 20MM.

International cement manufacturers have been on an acquisition binge over the past decade and I suspect that will continue. They all want to get more vertically integrated and control more of the end use of their product. So, they’ve been buying aggregate and ready-mix companies. Cemex, Hochim, CRH, LaFarge, and others, all big outfits, have been on the prowl. Pricing in the last several years has been between 11 and 14 X EBITDA for the assets of the acquired. Even in prior decades when pricing was more restrained and the dollar stronger, the multiple was in the 8-9X range.

I think RMIX can attract the big guys attention as there are not many national companies in the HBM category. Sales are near $900MM and they have leading market shares in about 6 areas. At the same time, they aren’t VMC, MLM, or TXI so they won’t be getting the top price. But they are worth more than $4 per share in a takeout and I think a sale could occur.

Total debt is about $300MM and they have 40MM shares outstanding. Assuming they could fetch a price of 10X EBITDA, that would be $600MM if earnings drop 20%. After paying the debt we have $300MM to split 40MM ways or a price of close to $8. If they show discipline and wait till the recession ebbs and construction is healthy again they could go for more. I think the price is up in either case.

Management has recently sold two business units that have under performed or didn’t reach scale. Are they cleaning up the operations to sell? If not, they are adding cash and improving margins so that isn’t all bad. Additionally the CFO bought 15000 shares in January at about $3 which is heartening.

I’m continuing to add shares when RMIX pulls back as I think it will pay off nicely within the next two years.
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