Chase Corporation (NYSE:CCF) reported its Q3 (ended May), and the results were strong, encouraging, and much better than our expectations - see statement here. Despite a fall in revenues of -10% YoY, which was expected due to COVID-19, the company did very well on margins and EPS. The company's EPS for the quarter was up +16% from $.90 to $1.04. Gross margins exceeded expectations in this strong financial quarter. Given below are some of the positive financial highlights, along with their key margin increases.
Following this strong EPS report, we are raising our full-year [ending Aug. 2020] EPS to $3.82 [from our prior forecast of $3.27 in our previous post - see here.]. Please see our attached model for details.
The fact that Chase held up on its revenue declines of -10% was commendable considering that they could have dipped even further given current operating and logistical environments, where companies are witnessing much greater year-on-year declines than the aforementioned figure. Following this result, we are raising our full-year revenue estimate slightly.
The company's cash positions also went up sequentially 23% to $83.3 million with no debt, representing 9.2% of the market cap or $8.95 per share, an increase of $1.62 per share from the last quarter. Free cash flow also rose by 21% from $12.4 million to $15 million. This being said, Chase's main focus this quarter was managing its costs in the most efficient way, and it was able to do a pretty good job which led to its stellar margin performance.
The company took salary cuts for executive-level employees up to 20% as well as non-employee board of directors. They cut global workforce by 4.5%, which is not much given that other industrial companies are cutting much more, and this won't damage the company going forward and leave their reputation unscathed. They reduced SG&A by 4%, which could be expected. Comments from senior management were nothing far from encouraging on capital utilization to enhance growth trajectories going forward.
We remain committed to our core strategic drivers, a principled approach to organic and inorganic growth, and operational consolidation, while maintaining financial flexibility with a focus on margins, cash flow and a strong balance sheet. These tenets have benefited the Company over the years and even more so now during the COVID-19 pandemic."
- Adam P. Chase, President and Chief Executive Officer of Chase Corporation.
Their focus towards organic and inorganic growth are particularly attractive points. The CFO has a similar viewpoint from the earnings release.
This is consistent with our strategic approach to prudently deploy capital to enhance our portfolio of products and pursue inorganic growth to drive shareholder return."
- Christian J. Talma, Treasurer and Chief Financial Officer of Chase Corporation.
The risks stemming from COVID-19 have been mitigated and controlled well by the company in a highly orderly and efficient manner. Their cost-cutting measures have been nominal and not too severe to the point that will find it hard to cope and rebound near term. Chase has also been adding on to their increasing cash positions, which has been sequentially rising every quarter - a very positive sign for Chase to weather financial impacts and get through this crisis unscathed. This has, therefore, been a very encouraging and strong quarter from an analyst's viewpoint, and we reinforce our "Buy" target going forward as we have observed a considerable amount of the virus impact, and maybe the second half will yield similar outcomes - for which Chase is strongly prepared given the margins it has delivered.
Hence, we stand by our initial views on Chase, and we expect that once the heightened turmoil of COVID-19 dissipates by August end in US and world over, we see further upside in the cards. If you can get into the stock at the current price of $96.26, at an ex-cash P/E of 14.2x, and an FCF Yield on EV of 6.9% on steady-state FY21, we think the stock will reach its previous highs of $130.00 [valuation: ex-cash P/E of 20.0x and FCF Yield on EV of 4.9% on FY21] or more; coming from our own revised target price of $120.00. This will leave you with a 37% upside, on the premise of Chase's adept management and amazing, robust business franchise.
Chase Corp. is a market leader, with a long history in the manufacturing of protective coatings and sealant products. The company has robust fundamentals and it is a secular growth company, beating the S&P 500 Index and Russell Index 2000 over the course of the last decade, with no down years. The business is high-quality, and we believe it's a 'buy-and-hold' stock that could really outplay the market in the long run. The company has a stellar 10-year CAGR for EPS and revenue that have been 19.3% and 11.9% - both organic and inorganic growth respectively. We are really amazed at this sustained growth trend over time - very few companies can have such growth numbers. Chase has had only one down year in growth during this time (the current one), caused by minor headwinds in Asia because of the ongoing trade war, but we see this to be a transient phase that should be short-lived. Chase's strong track record and relatively undervalued metrics will help them overcome this and any other windfalls coming their way.
The stock price is down 26% to date from its highs of $127 in November (Q1 of FY) of last year; hitting lows of $55.05 in mid-March to rebound 71% till date. The price has remained reasonably flat since the start of COVID-19, a good sign of minimum downside risk. Amazingly, Chase's stock price has delivered 27% CAGR over the past 10 years, easily more than double the performance of the Russell 2000 and S&P 500 indices:
Source: Bloomberg terminal; Chase stock price versus S&P 500 & Russell 2000 Index over the last 10-year period.
As a thesis, Chase has a fundamentally secular business, with good cash reserves, attractive valuations, and numerous value-added catalysts with huge potential. The slight dip in the share price represents a buy-in opportunity for investors, and we believe that the minor headwinds [Asia, trade war, COVID-19] that they are facing currently is just noise and will pass given Chase's track record.
Source: Chase Website
Chase Corp. is a leading manufacturer of protective materials for high-reliability applications across diverse market sectors for the last 50 years. Chase Corp.'s business encompasses the primary processes of manufacturing protective coatings, industrial coatings, and tape products. It also indulges in insulating and conductive-based solutions works.
The company has made and sold under the subsidiary, Chase & Sons, branded protective tape and coatings, including conducting and insulating products for cable and wire makers. Chase processes almost any flexible material produced on a roll - films to fabrics. It makes laminates, sealants, and coatings for pipeline, construction, electronics, as well as printing markets. Chase pipe coating tapes, Tapecoat and Royston, are sold to oil companies and gas utilities. The company also offers expansion/control joint systems and asphalt additives for roads, bridges, and stadiums.
Secular Growth over the Last Decade
Source: Seeking Alpha Data (Excel): Chase earnings
Based on the data, growth has been consistent and surging. Furthermore, there has not been one single down year in the growth in these three metrics since 2009:
These 10-year growth rates are incredibly impressive when put on the benchmark and compared with industry standards. It is a sign that this stock has a great track record and has overcome the recessionary odds stacked against it.
The same philosophies (acquisitions and M&A) have stood by the company for the last 20 years, during which it has shown strong financials and a solid track record. Business runs within the Chase family - Adam P. Chase, CEO since 2015 and Peter R. Chase, CEO since 1992 (28 years as President). Chase family has ~14% insider holdings. The stock price has grown 1,004% over the last decade, as a result of good business practices by management over the last 20 years. We believe that the Chase family will continue growing the company like they have with acquisitions and operational success in mind.
This is the biggest catalyst and a game-changer for the company looking towards the future. We see this to be a material catalyst for this stock. The Internet of Things (IoT) defines all the next big things that are coming out into the technology, internet, and Wi-Fi space. Advancements include 5G, autonomous vehicles, AI-related breakthroughs, strides in telecommunication, and more in development, etc. This next state of technological advances will act like a huge bubble, inadvertently bolstering the need for greater bandwidth, and data for devices entering the market at an explosive rate.
While our pulling and detection tapes, conformal coatings and communication cable materials are anticipated to realize the greatest lift from this macro trend (IoT), a myriad of products in all three segments are poised to benefit. 5G (fifth generation cellular wireless) will also impact this trend, increasing the demand for further infrastructure build-out to support this evolved technology." - Chase.
IoT devices market is anticipated to grow from $190 billion in 2018 to $1.1 trillion in 2026 - a 24% CAGR, according to Fortune Business Insights.
The company has an FCF yield of 5.8% and 6.9% on EV (Enterprise Value) for FY19 and FY21e, respectively. We have discounted most figures from FY20e, based on the abnormal year because of COVID-19 impacts. The FCF increased 17% to date and based on our predictions we extrapolate from actuals to 2021, an increase of 48%. The initial company's net cash of $48 million ($5.09/share) is 5.4% to the market cap for 2019.
Subsequent to this, in Q1 ended November 19, cash rose by $19 million and this indicated an FCF increase of 60% to reach $66 million net cash - this gain happened in a single quarter. This led us to a reevaluated net cash ($7.33/share) of 7.6% to market cap with zero debt on the B/S. It further increased in the 3Q-ended May to $83.3 million, leading to a 9.2% cash relative to the market cap. This successive increase in cash QoQ will help Chase maintain a healthy B/S to weather the COVID-19 impact.
Chase is an amazing business and it has proven this at a fundamental level with its stellar growth rate (19.3% EPS CAGR over a 10-year period) and consistent gains. From a financial standpoint, the company showcases considerably strong metrics, with an attractive free cash flow yield of 6.9% on EV for FY21 steady-state estimates because of a healthy net cash/share position that shows no debt. Their adjusted P/E is 17.9x on actuals (S&P 500 trailing is 21.5x). But going forward on 2021 estimates, we see the adjusted P/E to be only 14.0x because of the company's rising net cash ($13.89/share) and high amortization ($1.32/share on ~$4.00 EPS), making it highly undervalued. Chase's catalysts primarily lie in IoT (Internet of Things), stable management, and secular growth (trailing as well as predictably long-term).
We are, therefore, bullish on this stock. If you can acquire the stock at the current market price of $96.26, at an ex-cash P/E of 14.2x and FCF Yield on EV of 6.9% on steady-state FY21, we think the stock will reach its previous highs of $130.00 [valuation: ex-cash P/E of 20.0x and FCF Yield on EV of 4.9% on FY21] or more; leaving you with 37% upside on the premise of their adept management and amazing, a robust business franchise.
We are very impressed with these overall great results reported for Q3. The financials have been sound, and they were above our estimates, with the company not having a significant revenue decline, and margin increases leading to an EPS gain of 16%. Cash reserves have also increased sequentially, representing 9.2% of the market cap, or ~$9 per share, with minimal cost-cutting measures taken. We have revised our price target to $130 (from $120.00) to show even more upside and we definitely feel that Chase, as a franchise and robust business, will come out strong from this pandemic period and will reach its pre-COVID-19 highs of ~$130, and at this price target, investors can expect an upside of 37% on their investment.
You can download our 10+ page research report: Chase 3Q-Update Report. This report has our detailed analysis of Chase, inclusive of a financial model, IS/BS/CF forecasts, rigorous ratio analysis, DCF valuations, and price targets.
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