It is a curious case of "missing" value. For months, I have been watching three small cap stocks - NL Industries (NYSE:NL), Kronos (NYSE:KRO) and CompX International (NYSEMKT:CIX) - (okay, Kronos is not technically a small cap, as it has market cap north of $1.5 billion) and have been noticing an interesting trend.
NL Industries is a holding company that owns 87% of CompX International, who is a manufacturer of security products, precision ball bearing slides and ergonomic computer support systems used in the office furniture, transportation, consumer products and a variety of other industries. This subsidiary sports a market capitalization of $177 million as of this writing.
NL also owns 30% of Kronos, which has a market capitalization of $1.55 billion as of this writing. Kronos is a fairly large manufacturer of Titanium Dioxide (TiO2), a common industrial chemical and pigment, used in a variety of industrial and consumer products. Not surprisingly, it trades at a much lower P/E than CIX. But here is where the math gets interesting.
Going by weighted average ownership, NL Industries must have a market cap of about $620 million (30% of $1.55b + 87% of $177 million). As of this writing, it trades at $10.50 a share, which gives a market cap of $511 million ($10.50 x 48.67 million shares outstanding). So, the parent is trading at an 18% arbitrage discount to its ownership value of both KRO and CIX. Over the last few months, this discount has gone up to as high as 25%.
This means that by owning NL Industries, you pay for Kronos ownership and get almost the entire CIX business (87% to be exact) for no cost! Interestingly, the discount is always on NL Industries and not a +/- variance around the underlying market value. So, I could not attribute this to short-term fluctuations.
With all due respect to strong-form subscribers of Efficient Market Hypothesis, this appears to me as a clear case of market mis-pricing. This reminds me of the legendary value investor Seth Klarman's advice that is often better to own the parent than the subsidiaries because the complexity of parent's ownership of different assets often causes investors to mis-price it compared to a subsidiary or a spin-off, which gets a lot of market attention.
In this case, NL Industries' ownership of two rather disparate companies in different industries is probably confusing the investors on what it is truly worth, though the market value is clear. In any case, if you want a play in this base material (Titanium Dioxide) industry and wish to own an industry veteran, NL Industries makes more sense to own than Kronos. Besides, you get a precision engineering company thrown in almost for free!
And until the market decides to give NL Industries a justifiable boost to correct this mis-pricing, the investors get a 4.76% dividend yield just to wait.