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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