The premise of this article and the company that I will cite for investment consideration is based on federal legislation that went into effect earlier this year and placed additional requirements on products in this market place. On January 4, 2014 Federal Law mandated that the wetted surface of every pipe, fixture, and fitting sold for or installed in potable water applications not contain more than 0.25% lead by weight. On the surface there are probably many that don't see this as a public issue or even might think that this is "big brother" making one more intrusion into one's life. The issue of lead poisoning has become better understood when it was discovered to what degree the products being imported from China, especially children's toys, were found to contain unsafe levels of lead. Now one can find in various medical reports the thinking that levels of lead in products could be the root cause for many childhood maladies. I will defer from engaging in debate about whether it's environmental issues, such as harmful products laden with deadly chemicals, causing the growing trend towards childhood attention deficit disorders, autism, etc. However, I think we will all agree that something is impacting more and more of our children's health and normalcy in their medical conditions.
Going forward, I think those companies with products that can be impacted in a positive way by addressing this need for replacing the lead in piping and other fittings in our public water supply; the potential is great for such companies. The company that I'm writing about is Global Brass and Copper Holdings, Inc. (NYSE:BRSS). At the time of my writing this article, the stock was trading at $17.00.
The following is a synopsis for the various operations for the corporation. Their website can be found here and those interested in the corporation can find more detailed information there:
Global Brass and Copper Holdings, Inc.
* Global Brass and Copper Holdings, Inc., through its wholly-owned principal operating subsidiary, Global Brass and Copper, Inc. is a leading, value-added converter, fabricator, distributor and processor of specialized copper and brass products in North America. (Future references for the company will be noted as --Global)
* Global's operations concentrates on metal melting and casting, rolling, drawing, extruding and stamping to fabricate finished and semi-finished alloy products from processed scrap, copper cathode and other refined metals.
* Its products take in a wide range of applications: sheet, strip, foil, rod, tube and fabricated metal component products.
* Its products are marketed under the Olin Brass, A.J. Oster and Chase Brass brand names.
* The end markets for the Global products have applications for the building and housing, munitions, automotive, transportation, coinage, electronics/electrical components, industrial machinery and equipment and general consumers.
* Global employs approximately 2,000 people.
* Global currently has 11 manufacturing facilities and distribution centers across the United States, Puerto Rico and Mexico to service their North American customers.
* Through joint ventures Global has 80% ownership for operations in China and another 50/50 joint venture in Japan, plus sales offices in China and Singapore. This gives Global major exposure for the Asian markets.
* With distribution arrangements in the United Kingdom and Germany this allows Global to provide service for their European customers.
One might note that when the company was taken public on May 23rd, 2013, KPS Capital Partners, LP offered its shares for trading on the NYSE. This is a link that gives details for this offering. One might also have a duty to note that a unit of KPS, Halkos, currently has an active offering of additional shares that should be concluded on January 28th, 2014. It also should be noted that from the initial indication the number of shares and over-allotments has been increased. One can take this information two ways---it is selling more shares or there is a greater demand for these shares. I prefer to think it's the latter. Should these shares be sold, none of the proceeds will accrue to the company.
As mentioned previously, the company operates under three different operating units:
· Olin Brass: "The leading manufacturer and converter of copper and copper-alloy sheet, strip, foil, tube and fabricated components in North America. While primarily processing copper and copper-alloys, Olin Brass also rerolls and forms other metals such as stainless and carbon steel. Olin Brass's products are used in five primary end markets: building and housing, munitions, automotive, coinage, and electronics/electrical components."
· A.J. Oster: "A leading distributor and processor of copper and copper-alloy strip products as well as phosphor bronze, nickel, silver, stainless steel and aluminum products. A.J. Oster is strategically focused on satisfying its customers' needs for brass and copper strip and other products, with a high level of service, quality and flexibility by offering customization and just-in-time delivery. A. J. Oster has six service centers in the United States and Mexico, which are strategically located with the objective to service customers throughout North America. A.J. Oster's value-added processing services include precision slitting and traverse winding to provide greater customer press up-time, hot air level tinning for superior corrosion resistance and product enhancements such as edging and cutting. A.J. Oster's products are used in three primary end markets: building and housing, automotive and electronics/electrical components."
· Chase Brass: "A leading North American manufacturer of brass rod. Chase Brass principally produces brass rod in sizes ranging from 1/4 inch to 4.5 inches in diameter. The key attributes of brass rod include its machinability, corrosion resistance and moderate strength, making it ideal for forging and machining products such as valves and fittings. Chase Brass produces brass rod used in production applications which can be grouped into four end markets: building and housing, transportation, electronics/electrical components and industrial machinery and equipment. Chase Brass manufactures all brass rod at its facility located in Montpelier, Ohio, and distributes all of its products directly to customers. Chase Brass holds exclusive rights for the production and sale of lead-free brass rod in North America, sold under the Green Dot™ Rod and Eco Brass® alloy brand names."
Positive Considerations for Investing:
· After being taken private in 2007 the new ownership was able to cut costs, discontinue unprofitable businesses, and negotiate for a better labor agreement.
· For the September quarter of 2013, sales rose 12%, from 2012, based on a 6% volume growth.
· This growth came from construction, automotive, munitions and the coinage market. However, there was weakness in the electronics market that they serve.
· It has a strong free cash flow, and this should support its $379 million dollars in debt, or three times EBITDA.
· The company is operating currently with a near 65% of capacity, so it has an excellent opportunity for operating leverage. Should this occur, its margins should improve, resulting in what should be expected as nice share price increase from the current level.
· In November of last year, management implemented a cash dividend that yields less than 1%, but in my opinion, this indicates that with future earnings they could increase this dividend.
Negative Considerations for Investing:
· With only one quarter's results as a public company, it might be prudent to wait and see what this last quarter reflects as it relatives to the positive trend shown in the previous quarter.
· The aforementioned secondary offering by its largest shareholder, Halkos, was finalized on January 28th. This doesn't increase the float amount as that remains the same. It does reflect that this major shareholder (34%) has reduced their position. However, as with all investment firms such as KPS Capital, that is what they do---take a firm private, clean up the operation based on the aforementioned actions and eventually place the company back on the list of public companies.
· The munitions market business is one of its larger markets, and with recent public concerns over gun ownership and military actions that our military is involved in; this market has been excellent for the company. Personally, not being a strong advocate for gun ownership, I don't see any abatement for those who own guns and them curtailing their usage and need for more ammunition. For just one anecdotal example of this, the golf course where I often play is near a gun range and I haven't seen any lessening of gun fire sounds that must be equal to what was heard at the Battle of the Bulge. What I would suggest; one needs to do their own due diligence on this market segment and factor this issue into one's decision whether or not they take a position in the stock.
· There have been some market advocates that have suggested that the government is looking at replacing the dollar bill with a coin. I totally discount this possibility as the government attempted this several years ago and it's my understanding that the government storage of such is over flowing with coins. I would place no future growth in the near term for benefiting from this issue.
Conclusion: At the current time I have no position in the stock. However, I would suggest that those interested in a company that has been returned to the public market place this company under your personal due diligence process as a future investment candidate. This type occurrence has shown that going public with new operations in place and the elimination from old restraints, the market treats such corporations in a more positive light due to the growth opportunity. I would also devote time to looking at your local area to see how the construction market for new housing and commercial buildings is happening. In my personal area, the market is booming for both and would be even better if we could arrange for the Polar Vortex to disappear. Before I decide to invest, I will wait and see what the next quarterly report reflects and what projections are made for 2014. You might say that I don't have the brass at the moment to place my bet-but I consider the opportunity being there for an investment in the near future.