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Summary

  • Small cap stocks are often overlooked by investors when markets are at all-time or multi-year highs.
  • I believe that there are still undervalued/fairly priced small caps available that will make nice long-term investments.
  • Out of this group of Coal and Industrial Metals & Minerals industries, I feel that Materion and U.S. Silica are the two best long-term investment options currently available.

Overview

In April/May I wrote a series of articles that ranked the Dividend Champions based on a variety of metrics. Part 1 of that article can be found here.

In this series of articles, I will be ranking stocks of the S&P SmallCap 600 index. Part 1 can be found here. I will be using the following 10 metrics to gauge each stock by:

  • Revenue Growth (past ten years)
  • Earnings Growth (past ten years)
  • Price Returns (past ten years)
  • Return on Assets (trailing twelve months)
  • Return on Equity (trailing twelve months)
  • Return on Invested Capital (trailing twelve months)
  • Price to Free Cash Flow (trailing twelve months)
  • Debt to Equity Ratio (annual)
  • PE ratio (trailing)
  • PE ratio (forward)

The scoring system is simple. If there are 8 stocks in the industry being reviewed, then each metric will have a score between 1-8, with the best performing stock receiving an 8 and the worst performing stock receiving a 1.

For this article, I will be taking a look at the Coal And Industrial Metals & Minerals industries within the Basic Materials sector. Six stocks will be reviewed, so each metric will have available scores of 1 through 6.

Because of the higher number of stocks being looked at throughout this series, I will be relying on data provided by Ycharts.

The six stocks are:

  • Arch Coal (NYSE:ACI)
  • Cloud Peak Energy (NYSE:CLD)
  • Materion (NYSE:MTRN)
  • Globe Specialty Metals (NASDAQ:GSM)
  • Stillwater Mining Company (NYSE:SWC)
  • U.S. Silica (NYSE:SLCA)

Arch Coal

ValueScore
Revenue Growth (past ten years)93.70%3
Earnings Growth (past ten years)-426%2
Price Returns (past ten years)-78.30%1
Return on Assets (trailing twelve months)-7.40%2
Return on Equity (trailing twelve months)-27.94%1
Return on Invested Capital (trailing twelve months)-9.14%2
Price to Free Cash Flow (trailing twelve months)28.64x4
Debt to Equity Ratio (annual)2.29x1
PE Ratio (trailing)16.24x6
PE Ratio (forward)12.45x6

Looking at the table above, you can see that Arch Coal scored a combined total of 28. The company has seen large losses in both price and earnings over the past ten years, but has seen decent revenue growth. The company is also attractively priced if you see a turnaround in its near-term future.

Cloud Peak Energy

ValueScore
Revenue Growth (past ten years)-1.51%1
Earnings Growth (past ten years)-95.20%3
Price Returns (past ten years)28.77%3
Return on Assets (trailing twelve months)0.89%3
Return on Equity (trailing twelve months)2.15%3
Return on Invested Capital (trailing twelve months)1.35%3
Price to Free Cash Flow (trailing twelve months)9.90x6
Debt to Equity Ratio (annual)0.60x3
PE Ratio (trailing)56.71x2
PE Ratio (forward)212.33x1

Looking at the table above, you can see that Cloud Peak Energy scored a combined total of 31. The company is the only one out of this group that has seen a loss of revenue over the past ten years. It also has the highest valuation based on its forward PE ratio.

Materion

ValueScore
Revenue Growth (past ten years)104.5%4
Earnings Growth (past ten years)16.01%6
Price Returns (past ten years)104.50%4
Return on Assets (trailing twelve months)2.54%5
Return on Equity (trailing twelve months)4.56%5
Return on Invested Capital (trailing twelve months)3.78%5
Price to Free Cash Flow (trailing twelve months)27.06x5
Debt to Equity Ratio (annual)0.14x6
PE Ratio (trailing)37.73x4
PE Ratio (forward)19.57x5

Looking at the table above, you can see that Materion scored a combined total of 49. The company has seen the best earnings growth and has the lowest debt to equity ratio, while also possessing the second best returns on assets, equity, and invested capital.

Globe Specialty Metals

ValueScore
Revenue Growth (past ten years)70.90%2
Earnings Growth (past ten years)-40.90%4
Price Returns (past ten years)199.20%5
Return on Assets (trailing twelve months)2.08%4
Return on Equity (trailing twelve months)3.99%4
Return on Invested Capital (trailing twelve months)2.72%4
Price to Free Cash Flow (trailing twelve months)41.95x3
Debt to Equity Ratio (annual)0.30x5
PE Ratio (trailing)88.60x1
PE Ratio (forward)41.59x2

Looking at the table above, you can see that Globe Specialty Metals scored a combined total of 34. The company has low debt and has seen significant price returns over the past ten years. However, the stock appears overvalued based on trailing and forward PE ratios.

Stillwater Mining Company

ValueScore
Revenue Growth (past ten years)218.50%6
Earnings Growth (past ten years)-722%1
Price Returns (past ten years)17.20%2
Return on Assets (trailing twelve months)-17.14%1
Return on Equity (trailing twelve months)-27.65%2
Return on Invested Capital (trailing twelve months)-20.30%1
Price to Free Cash Flow (trailing twelve months)163.69x1
Debt to Equity Ratio (annual)0.38x4
PE Ratio (trailing)38.63x3
PE Ratio (forward)26.23x4

Looking at the table above, you can see that Stillwater Mining scored a combined total of 25. The company has seen the highest revenue growth out of this group of stocks, but has been able to translate that to the bottom line. The company has the worst earnings growth and returns on assets and invested capital out of these six stocks.

U.S. Silica

ValueScore
Revenue Growth (past ten years)146.50%5
Earnings Growth (past ten years)207.00%5
Price Returns (past ten years)232.70%6
Return on Assets (trailing twelve months)9.56%6
Return on Equity (trailing twelve months)26.48%6
Return on Invested Capital (trailing twelve months)12.30%6
Price to Free Cash Flow (trailing twelve months)85.74x2
Debt to Equity Ratio (annual)1.22x2
PE Ratio (trailing)37.34x5
PE Ratio (forward)27.44x3

Looking at the table above, you can see that U.S. Silica scored a combined total of 46. The company has the strongest returns on assets, equity, and invested capital out of this group of stocks; however, its balance sheet isn't quite as healthy. It has a high debt to equity ratio along with a high price to free cash flow value.

Conclusion

Materion is the highest scoring stock with a point total of 49, while U.S. Silica is a close second with a total of 46. Materion has seen the higher earnings growth and is a bit more attractively priced, while U.S. Silica has seen the better returns on assets, equity, invested capital, and stock price. Both companies scored significantly higher than the other four stocks in this group.

I believe that both companies have the potential to reward long-term investors with significant gains. Both companies have similar dividends, both yielding less than 1%. In terms of recent success, I feel that U.S. Silica had the better Q1 results. While both companies had overall increases in earnings, Materion did have a few roadblocks.

According to its last quarterly earnings call, Materion saw a 13% decrease in sales compared to the same period last year. In that call, the following statements were made:

When comparing the prior year levels, value-added sales were down approximately 4% and compared sequentially to the fourth quarter of 2013 were down 8%.

As previously referenced abnormally severe weather in the quarter negatively impacted value-added sales as did the automotive electronic destocking continues to sense sequestration and lower hydroxide shipments.

Shipments in the energy applications were up 16%. However, value-added sales in defense decreased 25%. Telecom infrastructure decreased 17% and automotive electronics decreased 15%. Both medical and industrial components decreased 10%

While value-added sales into defense were down 39%, energy was down 18% and medical was down 13%.

While severe weather had a negative impact on Materion's quarter, U.S. Silica was better positioned to deal with this factor. This was on display within the company's latest earnings call.

So while the severe winter weather may have challenged some of our competitors, our company had ample inventory already positioned in basin to meet customer demand, proving the strength and resiliency of our local inventory business model.

The result, total company volumes in the quarter were a record 2.3 million tons, a 22.5% increase over the same period last year, driven largely by surging volumes in oil and gas.

Across the company, higher volumes drove record revenue in the quarter of $180.1 million, a 47.2% improvement over the first quarter of 2013.

As the company looks to add capacity in the future, I feel that U.S. Silica is positioning itself to take advantage of increased market demand. I believe that Materion will also benefit from increased demand for its growing product mix.

I feel that both companies will reward long-term investors with solid returns. I believe that Materion is the safer investment as it has a strong balance sheet and has recently shown a strong desire to return shareholder value through both dividend increases (a 6.3% recent increase) and share repurchases (approximately 51,000 shares in Q1).

I believe that U.S. Silica has the potential to see higher increases in stock price compared to Materion, but feel it is also the riskier stock. Not only because of its slightly weaker balance sheet, but also because U.S. Silica has seen a 150% increase in its stock price over the last year. This has led to a high price to book value of 8.76x, which is significantly higher than Materion's 1.57x value.

While both Materion and U.S. Silica have risks associated with them, I feel that they are the best small-cap investments currently out of this group of Coal and Industrial Metals & Minerals industries. As always, I suggest individual investors perform their own research before making any investment decisions.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Outstanding Small Caps, Part 3: Materion And U.S. Silica