Violent Capitalist's  Instablog

Conservative Fair Value Estimate:  $8
Strategy: Buy 2% allocation now $5.30, prepare to increase allocation should stock fall below $4.50
North American Galvanizing and Coatings is a company that focuses on galvanizing and coating products to make them corrosion resistant. From Yahoo's summary they aim to serve "...highway and transportation, power transmission and distribution, wireless and telecommunications, utilities, petrochemical processing, industrial grating, infrastructure, wastewater treatment, water storage and transportation, pulp and paper, pipe and tube, food processing, agricultural, recreation, and bridge and pedestrian handrail, as well as original equipment manufactured products, including general fabrication." Or generally speaking, they provide corrosion-resistant services to products being applied in low stress environments. The importance of this is that it will be less cyclical and less linked to commodity end markets like oil/gas, and is instead more linked to population growth, development, and replacement cycles.

Some of our colleagues here at Seeking Alpha and on the street, have issue with the fact that zinc prices are volatile, making their earning volatile. This is only half true, because companies of this nature - tend to price their services and goods on a monthly basis (as well as make purchases for inventory on a monthly basis). The actual commodity risk for margin contraction is at times of extremely volatile zinc pricing on the downside only.

Financially, this is an extremely well managed company. The largest sticking point here is the fact that inventory has ballooned 50% to a whopping $7.5 million in the latest quarter (sarcasm!). Against a backdrop of $70+ million in sales and this figure is really a non-issue. In fact, if I were to make a poker-hand read on the raw materials build up, I'd assume it was an attempt to buy it on the cheap and stock up for the ballooning orders ahead from various stimulus projects around the country. Good move fellas! 

Evidence: http://www.kitcometals.com/charts/zinc_historical_large.html#1year

Moving on to the financials and we see the following:

Market Cap: $88mil (diluted)
Enterprise Value: $79mil
Debt: 0
Book Value: $51mil
Depreciation/Amortization: $8million
Capex: $3.5 million
CF ROIC: 20%

It's hard to fathom that such a boring business is making an ROIC of 20%, but I'd attribute that to their no-nonsense type management and a strong focus on ancillary products/services that are scalable with existing operations. Net income will be a tricky number to predict in the short run, but I think their #'s from 2nd quarter should be easily replicable in the future, which was at a time when municipalities and corporations were probably the most uncertain.

The sole analyst covering the stock (as per Yahoo) claims that NGA should be able to bring in just above 50 cents/share in earnings. I think that's quite plausible and will total about $8 million at minimum on average going forward. Add back depreciation and that number comes out to $12million. Subtract Capex and it totals $8.5million. That's an EV/FCF ratio of about 9x. If I assume that the company will continue to spend $3.5 million and earn a 20% CFROIC, FCF can grow to $12 million. Should the infrastructure replacement cycle really pick up, who knows where net income and free cash flow will explode too, but a figure of $15-18 million is not too hard to fathom.

Look at some other more direct infrastructure replacement/spending plays, and they are already priced for this sort of growth at EV/FCF ratios above 15x or higher!

Disclosure: Long NGA

The trajectory on this stock is pretty stupid, they are a 1 product company - a 1 product company that is steps behind the competition in every respect, to think that a financially weak mid-cap company can compete on the R&D scale of large caps without the weak balance sheet is just plain stupid.

If your long PALM I hope your praying each day that their partnership with Sprint.... pause as I chuckle...will actually amount to anything in the long-term. Short-term both companies are positioned poorly, but I'd rather invest in Sprint as a turnaround/buyout story than PALM.

Sprint...if the PRE was so awesome it will be offered by at least one other carrier by now.

Fact is that no one major, profitable, financially-well-to-do carrier really gives two cents about PALM, simply because all the other carriers have already developed working relationships with the larger players that will be sticking around for much longer - Apple, Blackberry, Samsung, Google, HTC, and whoever else is out there. It's just a matter of time they'll realize that PRE was a one-hit, hard-to-follow up product for a financially disastrously positioned company.

Not to mention their $190 mil in goodwill (probably worth what is in my toilet), actually makes their book value at -$600mil. Iphone margins are reportedly at about 20+%, good luck to you palm on beating that #, cuz without it your dead water (their current margins are 20%+). Who wants to bet that the other carriers will only give them a sub 25% (I'm being coy) cut to protect their working relationships with the larger handset players?

Talk of a buyout offer? Seriously? With all this info what kind of idiot buyer will take on this company? For all its losses and negative book value, a potential acquirer is better off just making an initial investment of their own by stealing the 2-3 employees that probably made the PRE work ($20 bucks Motorola is already on it).

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Conservative Fair Value: $20

Strategy: Sell July strike 10 puts for .55 and/or buy ACXM at $10.50/share or less

Result: approx 5% yield in 2 months via put strategy, potential 100%+ gain on shares within 5 years

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from Anuj Jain <anuj.jain@arjpartn... reply-to anuj.jain@arjpartnersl... to IR@hurray.com.cn, invigorate_hurray@yaho... date Tue, May 12, 2009 at 1:51 PM subject Shareholder Proposals mailed-by arjpartnersllc.com

hide details 1:51 PM (3 minutes ago)

Dear all,

 

While I agree that $4 share is a nice gesture, it does not really reflect the true value of the company. At a time while Hurray! has been investing and expanding into content in a growing consumer market disrupted by larger economic forces, does not mean that a 100% premium offer is a good one for investors.

 

The company has $60mil in cash on the balance sheet, effectively giving you the company's operations for about $30million. I see the company being able to produce $6million in cash flows easily. That needs to be accounted for.

 

I think a 10x multiple is fair, making the company's operations worth $60mil, or $120mil altogether by adding the cash hoard as well. Therefore, I propose a share price of $5.50 to be an acceptable starting point, effectively accounting for very little growth. I believe a more acceptable valuation of the company and its prospects will get management interested in what you have to say! You can always make the deal contingent upon due-diligence efforts and such anyways (which is also normal practice for serious bidders).

 

Regards,

--
Anuj Jain, CFA

disclosure: I am long HRAY

Spreads on the Sun Oracle acquisition have widened after reports came out on Friday that Sun has been accused of bribery in a foreign country. Oracle quickly noted that it was aware of the allegations prior to their acquisition.

This deal is still done.

You can now earn a 10-11% yield on this acquisition by going long Sun and shorting some Oct 2009 stricke 9 puts.

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Conservative Fair Value Estimate: $15

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