We’ve spent the last two days discussing where we’re looking for deep value plays and what type of company we want to buy when we get there. With both factors in place, it’s time to chat about my first Polish idea.
I can’t give away the name of the company because I’m writing about it in my Value Ventures report. But after reading this you find yourself interested, check out this page to learn more. We’re keeping access open until Sunday at midnight EST. There’s also a 60-day money-back guarantee, so there’s no risk to try it out.
Alright, let’s dive in!
Boring Business On Sale With 22% Free Cash Flow Yield
This first company is a very boring business. They make iron castings for various end-markets. The company specializes in painting, thermal processing, assembly and distribution of their castings. They sell to seven different markets, all which are boring on their own.
So, this is a boring business that no 18-25 year old wants to do. In other words, it passes that initial screen with flying colors.
There’s a few things I like about the business:
- Super cheap (2x EBITDA with 22% FCF yield)
- Monopoly on Cheapest & Strongest Product
- Growing Margins & Revenues
- High insider ownership
Not only do you have a cheap price, but you get growth with it.
The company’s averaged 20% revenue growth over the last ten years. During that time, they’ve nearly doubled EBITDA margins (7.5% to 13.7%). They’re able to increase margins and revenues because of two things:
- Monopoly on cheapest & strongest iron casting product
- Internal R&D department providing new efficiencies
Both these things translate into lower costs of production, which they can pass on to their customers in the form of lower prices. And to their shareholders in the form of higher profits, margins and dividends.
Speaking of dividends, let’s talk about capital allocation.
Skin In The Game & Capital Allocation
Management’s putting their money where their mouths are. The directors own roughly 11% and through various buybacks / tenders, the company itself owns 28% of common stock. Along with opportunistic buybacks, the company pays a healthy 6.50% dividend.
In other words, you can receive about the average market return in dividends from holding this stock, with all the potential upside from its discount.
I always start my analysis with how much I could lose. If I know that, the upside should take care of itself. In this case, the company trades at around 20% premium to its net asset value. So our downside should be around 20% or so from current prices. Maybe a bit more if you discount some of their balance sheet items (like inventory and PP&E).
Here’s where things get interesting. The current price indicates low expectations for the future. Mr. Market’s pricing in zero top-line revenue growth and no margin expansion. On top of that, Mr. Market’s assuming a continued rise in cap-ex as a percentage of revenues beyond their five-year historical average.
We don’t think the future will look like that for this company. And if we’re right, we should win big.
Remember, the company’s averaged 20% annual growth over the last ten years. If we assume a fraction of that growth and a slow EBITDA expansion (given monopoly on that product), we’d get 150% increase in shareholder value.
And those are conservative assumptions!
If we projected double-digit revenue growth over the next five years, the discount becomes downright silly.
Wrapping It Up
Tomorrow we’ll chat about another Polish company that caught my eye. In similar fashion, tomorrow’s company offers low expectations for the future. It’s a boring business led by its founders who have massive skin in the game.
Once again, if you’re interested in knowing exactly what companies these are, check out this page. We’re only keeping enrollment open till Sunday at midnight EST. After that we’ll be closing the service. There’s also a 60-day money-back guarantee. So you can try out our value research service for a few months and if it’s not for you, we’ll give you your money back. No problem.
I’ll see you tomorrow!
That’s all I got for today. Shoot me an email if you come across something interesting this week at email@example.com.
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Student of value investing for over 13 years spending his time in small to micro-cap companies, spin-offs, SPACs and deep value liquidation situations.