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LDSH: Flying low, but still flying

|Includes: Ladish Co., Inc. (LDSH)

This is my first "instablog".... I don't know if it will be published as an article later, but my intent is that it won't.  This is a quicker real-time way for me to share my thoughts.  I could tweet, I suppose, but then I would be restricted to a certain low number of characters.

Before going on, the standards of this type of submission are different than the typical article, but my standards, as always, will be consistent with my own desire to be as completely transparent as possible.  I added LDSH to my Top 20 model portfolio last week and made it a relatively large position in a fund that I manage for my family after riding a small amount down last year.  I had sold some shares yesterday near 9.60 but bought back some of them below 9 on the close.  I subsequently took the position to about 7% of the entire fund (which is 60% stocks and 40% bonds) near 8 this morning, so it amounts to about 11% of the part measured against stocks.  I also established a position for my children.  Despite the sharp drop today following disappointing earnings, the stock remains above my recent price of 7.90.  I believe that 7.60 should serve as support if it continues to weaken.

Ok, now that that is out of the way, allow me to quickly share my views.  Ladish is a great little company that is highly leveraged to aerospace.  We all know what a terrible industry that is now!  These guys compete with PCP for the most part, but they aren't as broad as them.  Over 1/2 the business is from engines, with about 1/3 from general aerospace and the remaining 16% last quarter from industrial.

The company trades below tangible book value.  Companies in worse competitive positions further upstream (ATI, TIE, ATI, CRS) trade above tangible book value except for RTI.  It has about $20mm of a one-year revolver in addition to $90mm of LT debt (amortizes over multiple years beginning in a few).  The company recently renegotiated, as usual, its revolver, but a covenant requiring EBITDA/Total debt >3X could present a challenge later this year.  It paid down about $10mm this past quarter on a big jump in FCF, but it isn't likely to generate FCF at the same rate. 

Sales were in line, but earnings stunk.  The main culprit was their inability to sell by-products  - leftover material carried at zero cost.  I asked on the call, and Mr. Larsen stated that the company is very unlikely to generate any losses this year (unlike the titanium suppliers possibly).  I also asked about better supply agreements, and Larsen indicated that one was already renegotiated as it was expiring and the company may be proactive about going back to another supplier.  This could prove very helpful to the economics.  Fortunately, the suppliers all have very strong balance sheets and can afford to be "realistic" without triggering any negative financial repercussions.

LDSH gets about 1/2 of its sales from Rolls Royce, United Technolgies and GE (in descending order).The tangible book value per share is approximately $11 per share (stock is just below $8 as I write, down from about 9 last night).  I have very little doubt that the company will ultimately be unable to cover the $20mm due next April, even if it violates the covenant (lenders are USB and JPM).  Note that the company recently diversified with its Aerex purchase that got them into helicopter engines.

I think that the stock could trade to 13 over the next year, certainly towards tangible book value, as people begin to understand better the possible earnings when it recovers.  While it may seem like a generic metal bender, it has a lot of technology and competes really with just PCP.  The company's management pulled them out of bankruptcy in the 90s, managed through the tough post-9/11 enviroment without any losses, and is unlikely, given how conservative they are, to let the company slip back into bankruptcy.  The stock is a call-option on the aerospace industry not totally shutting down!