|Feb 14, 2012|
And now we go back to steel.
Webco Industries manufactures and distributes carbon steel, stainless steel and other tubular steel products. The company is based in Oklahoma and was founded in 1959.
Webco Industries is, in many ways, your typical pink sheets manufacturer. The company has a long, profitable operating history and lots of tangible assets to back up the share price.
At present, the company trades (infrequently) at a sharp discount to book value and at severely depressed multiples compared to competitors.
Webco's track record of growing sales and profits is solid. Since 2002, revenues have grown at 13.2% annually. Even in the worst 0f the economic crisis, the company remained EBITDA positive. Revenues for the twelve trailing months sit at an all-time high for the company. Still, the economics of the steel industry are not stellar. The manufacturing process is capital-intensive and foreign competition is a real threat. Even in strong years, Webco has struggled to achieve NOPAT/Invested Capital of much over 10%.
Webco has increased book value significantly through the last decade. The company does employ a significant amount of debt, but not materially more than its competitors.
With a P/E of 3.63 and an EV/EBITDA of 4.00, Webco looks cheap on an absolute basis. The company also looks cheap when compared to a group of steel manufacturers with enterprise values under $1 billion. Webco has a superior gross margin, EBITDA margin and net margin to most others, yet trades at less than half the valuation.
The average EV/EBITDA for these competitors is 8.59. It's unlikely that Webco will ever trade at that level, due to its small size and obscurity. However, if Webco would trade up to just 80% of its competitors' valuation (EV/EBITDA of 6.87) then equity value would rise by 150%!
The biggest mark against Webco Industries is its lack of free cash flow. The steel industry is mature and true growth opportunities are scarce, yet the company directs all of its operating cash flow year after year to capital expenditures. The company itself is confident in its ability to create growth through capital spending, with the CEO saying "We are progressing with the development of additional facilities and new product offerings. It is our intention to continuously deploy capital in pursuit of organic growth opportunities that are consistent with our long-term niche strategy" in the most recent quarterly report.
Time will tell.
At 68% of book value and 3.63 times trailing earnings, Webco Industries looks like a great value for patient investors. If management can grow the company in a disciplined manner, acquirers may come calling.
Disclosure: An account I manage holds Webco Industries.