rock boy

Cautiously Optimistic About Vulcan Materials

There are two big problems with VMC. The first is that they did an incredibly stupid acquisition of Florida Rock paying top dollar as the company was in the midst of a massive downturn in its core Florida markets (which is of course compounded by the declines in VMCs core CA/GA/NC markets). Second, as industry volumes are now down 15-20% this year and probably down mid teens next year (even with the stimulus which is really about a 5 year spend) I think the industry is going to have a pricing problem. VMC (and MLM) worked well despite the downturn in housing because they were able to increase prices 10-15% per year. This year that slowed to mid single digits and was in fact helped by the fact that diesel prices were up significantly for the year (everyone had to maintain price integrity to cover higher fuel costs). With diesel down again (which will be a tailwind for next year), I'd expect pricing to come down significantly. MLM said last week that they expect price to be up ~4% in 2009 after being up ~7% in 2008. That is probably too optimistic.

The stimulus will be a positive but I'm not sure how much it will really help the industry. First, states are slashing their road budgets across the board. UT and NC in the past week announced significant cuts which haven't been baked into expectations. As a result, the stimulus will most likely only fill in these state spending holes. Second, I've been following this industry long enough that stimulus never seems to actually show up. A few years ago CA passed the huge infrastructure bond initiative - 3 years later those dollars haven't made a dent in CA demand. Third, even if the stimulus is additive, the money they are talking about is a 5 year budget amount so the incremental benefit will be much less than expected. UBS had a note this morning that said that to justify the moves in the stocks over the last 3 weeks the stimulus spend would need to be $100 bn in 2009 alone which is highly unlikely.

Bullish on Mexican Chicken

what is their corn exposure? I know for PPC in the US that every 1c move in the price of corn = $3 mm in additional COGS so the $1.20 move in corn over the last 2 months = $360 mm in reduced profitability = most of their earnings.

What does it look like for IBA?

Blue Nile: A Classic Underpromise, Overdeliver Company

Interesting comments. I think you missed one small item - orders only grew 14% in the quarter y/y. Avg Selling Price (ASP) increased 11% in the quarter (and Gross Profit per order followed suit) not due to price increases but simply due to mix. The last time the company posted a double digit ASP increase was Q2 06 - 13.6%. The next quarter it was 6.3%, the quarter after that it was 2.3%. So assume that ASP growth will revert to the mean (it has averaged 5% over the last 8 quarters) and order growth remains mid teens, you have revenue growth of ~20%. Not too shabby. Assuming they earn the $1.00 they are guiding to this year and can get operating leverage they can grow earnings 30% next year (on 20% revenue growth), they'll do $1.30 next year. Also not too shabby. But you have a stock that is trading at (hope you are sitting down) 63x that 2008 number.

When they asked the CEO about the slowing order growth his response was he doesn't even think about orders just traffic. I don't think I've heard a CEO of a public Internet company utter those words since February 2000.

Net net, good company? Yes. Very good business model? Yes. Worth 63x next year's earnings? Not a chance.

Here's Hoping For a U.S. Concrete, Inc. Buyout

Now RMIX looks really interesting after last night's pre-announcement. The stock is now trading at about 6x 2007 depressed EBITDA that I figure is in the low $80's. That is a valuation I can get very excited about. With any stabilization in housing, EBITDA goes back into the mid $90s, the multiple goes back to 7-7.5x and the stock is a $9-10 stock a year from now. You may get their sooner if there is a buyout though I think that is less likely given the current credit markets. Even without multiple expansion you get back to $8 from $5.25 today.

LoopNet's 3Q Results Sizzle Past Estimates

Good quarter across the board but read the transcript. Churn was above historical rates (they don't state it explicitly but indicate it was outside of the traditional 3-5% monthly churn rate). Mgmt indicated that Premium Subscribers would decline sequentially in Q4 due to price increases, higher churn and soft commercial real estate market. I wonder if the company is beginning to hit the ceiling on raising prices which you can only do for so long before you start losing subs (which they are now seeing). So you have a company that is being valued at ~25x 2008 EBITDA that is not seeing any subscriber growth in Q4 which is likely to carry into 2008. Put another way, the company is valued at about $9k per paying subscriber that generates $53 per month in revenue but has a half life (based on 5% monthly churn) of about 10 months (lifetime value of a customer is about $1500). I'd love to own this business personally because it is a cash cow but at no where near these valuations.

LoopNet's 3Q Results Sizzle Past Estimates

Good quarter across the board but read the transcript. Churn was above historical rates (they don't state it explicitly but indicate it was outside of the traditional 3-5% monthly churn rate). Mgmt indicated that Premium Subscribers would decline sequentially in Q4 due to price increases, higher churn and soft commercial real estate market. I wonder if the company is beginning to hit the ceiling on raising prices which you can only do for so long before you start losing subs (which they are now seeing). So you have a company that is being valued at ~25x 2008 EBITDA that is not seeing any subscriber growth in Q4 which is likely to carry into 2008. Put another way, the company is valued at about $9k per paying subscriber that generates $53 per month in revenue but has a half life (based on 5% monthly churn) of about 10 months (lifetime value of a customer is about $1500). I'd love to own this business personally because it is a cash cow but at no where near these valuations.

Here's Hoping For a U.S. Concrete, Inc. Buyout

Not that surprised by the results. Obviously the other income line helped them in getting to the midpoint of the revised guidance. It looks like they've pulled down 2H volume guidance from flat to down mid to high single digits which makes more sense in the current environment. However, to make guidance I think they are going to need the June price increase to stick and material margins will need to continue to expand which might be difficult in this environment and they are going to need a big Q4. So overall, the guidance looks more achievable now than it did after the Q1 call but I still think there is risk to the guidance. The real question now is valuation -- the stock is now trading at where it did after the Q1 call on lower guidance and well above where it traded in January before the company reiterated guidance (which it has now lowered). It wouldn't surprise me if the stock gives back most of its gains from yesterday over the next two weeks.

Here's Hoping For a U.S. Concrete, Inc. Buyout

No problem. At the end of the day, I think this is a good company that is basically a call option on a recovery in housing. That said, the prospect of a turnaround in housing continues to get pushed out which just extends out when this company will start to get interesting. At current prices, it feels like you have to bet on a recovery starting in Q4 which I don't think is likely.

Here's Hoping For a U.S. Concrete, Inc. Buyout

Good question. This is truly a local business. Let's say within Dallas (RMIX's largest market), clearly they are a logical buyer for assets because (i) there are some synergies by consolidating depots etc. but you don't really do much about the biggest cost which is materials like cement and aggregates; and (ii) you might take out someone who is polluting price in the market. So buying smaller players at 4-5x EBITDA can create some synergies. However, outside of tuck-ins, my understanding is that the biggest players in consolidated markets (i.e. like RMIX's operations in Dallas) might go for as much as 6-7x EBITDA. Still below where the stock is currently trading. So then you need to ask yourself, would a cement maker buy them to forward integrate? I don't think that makes much sense as noted in my prior post. Also, most of the large cement players would only want concrete companies in markets that they are already in. So for example, TXI which has plants in TX and Southern CA might want concrete operations in those markets (in fact it does have concrete in TX - this is how the business started about 50 years ago) but wouldn't really want concrete in MI, Northern NJ, Northern CA etc. which are the other markets that RMIX operates in. TXI wouldn't want to buy these plants in the hope of eventually building cement operations there because it is virutally impossible to get any new cement plants permitted (this is another reason why I think cement is a better business than concrete).

All that said, the stock was up 16% today so I might be wrong (though I suspect that the other shoe is about to drop that a major hedge fund is in liquidation and was liquidating a number of long and short positions today regardless of price). Earnings will be interesting tomorrow.

Good luck.

Here's Hoping For a U.S. Concrete, Inc. Buyout

Not sure if you should be as optimistic that this signals an increased likelihood of a change of control. As disclosed in the proxy back in April, each of the managers already had this program in place pursuant to employment letters or previously issued employment agreements. The new CEO got the same deal as the old CEO (3x annual base plus bonus) and the CFO got stepped up from 1x to 2.5x (he also got promoted), and it looks like the rest of mgmt stayed in line with their old deals.

Besides, not sure how a buyout of this business would happen. Though it trades at only 7.5x EBITDA, RMIX is buying concrete producers for 4-5x EBITDA. There are not much in the way of synergies (by mgmt's own admission) so outside of arbitrage it is not clear what value they are creating.

Finally, to your point that a cement producer would want to buy a concrete mfr - I'm not really sure that is the case. Domestic cement mfrs enjoy very good pricing power given the shortage of domestic cement (and high cost of imports) in the US. Generally, cemenet mfrs do not have issue finding customers for their product so they have little need to forward integrate. Concrete producers are much more of a commodity who quite frankly are getting squeezed between the pricing power of the cement (+8% pricing) and aggregate (+12-14% pricing) makers (the combined cost of which which represent about 50% of revenues) and the the housing slump (about 50% of concrete is used for residential).

Deltek IPO: Arriving A Decade Late To The ERP Debutante Ball

Uhm, had you read the S-1 a little closer you would see that it did go public in 1997 and then went private in 2002. "We changed our name to Deltek Systems, Inc. in August 1984. In 1985, we introduced our first product, System I. In 1997, we completed an initial public offering of our common stock, and in May 2002, we became a privately held company through a going private transaction. In April 2005, we completed a recapitalization in which the New Mountain Funds acquired their interest in our company."

I owned shares in the company back then. The company has a near monopoly among any project based supplier to the US gov't. Any service provider needs to do their billing in a very specific manner which bears little resemblance to private companies which creates a profitble little niche for Deltek. The market is too small for mainstream PSA guys that you mentioned to go after. Sounds like it may be trying to break out of that niche by going mainstream which is obviously a far more crowded market.