Today, I ran across an interesting article located at Motley Fool.com that was originally published March 1, 2007. The article is entitled "Time for a Hard Look at Cement." I found this article while browsing through some stocks. I try to stay informed about this business, since I am not an expert by any means, and I am an avid investor in Ash Grove Cement Company (ASHG, as we have all come to know and love...well, at least if you bought some). ASHG represents a good chunk of my portfolio and I own some directly, for each of my daughters, and my IRA. I think my brother owns a few shares himself.
Specifically, the following excerpt stood out:
"During the past few decades, a progressively larger share of U.S. cement assets have become foreign owned. At the same time, domestic demand for cement has been buoyed by a series of federal highway bills, the latest of which was signed into law in 2005, and will result in the spending of about $285 billion over the next half-dozen years on highways across the nation. Somewhat as a result, even when operating near their rated capacities, U.S. cement plants in the aggregate can only produce about three-fourths of the nation's demand."
For any loyal Terence blog followers, you will know that one big reason why I like ASHG is its unique position as the largest American owned cement company in the country. I believe that our country's growing demand for the product, coupled by the even more aggressive demand of foreign countries and the fact that the top 4 producers of cement in this country are owned by foreign companies will have some serious implications. ASHG's position as the largest American owned will, I believe, play into their favor in the coming years and beyond.
Apart from the $285B Highway Spending project, which is no secret, I did not know that domestically, we only produce 75% of what we need in terms of cement, thus, we rely on imports and foreign controlled cement to sate our needs. In the future, as the price of cement rises, and as China, India, and other countries use more and more of the stuff, that missing 25% of our need is going to cause a problem.
ASHG never makes it into these articles, depsite being the 5th largest cement company in the country and the largest American owned. This is mostly because ASHG likes to keep to themselves and nobody thinks of them as a public company, even themselves. I even find articles about ASHG where an employee of ASHG says they are a private company. Who knows - it's really weird. It's probably the only company in the world that does not want anyone to know about their stock.
The biggest piece of news in the business was recently Florida Rock (NYSE: FRK) got bought out. I briefly thought about looking into buying some FRK before the buy out was announced, but too bad I did not. Anyway, FRK got bought out at a huge multiple - a 42% premium on their stock price before the deal was announced. More important, it was bought out for 11.3x EBITDA, which is a 28% higher rate than Cemex (NYSE: CX, Mexico) has offered to pay for Rinker (NYSE: RIN, Aussie, but 85% of business is USA).
In short, what this is saying is that individual companies are seeing the need and the opportunity to control more cement distribution and production, especially considering the problem of the 25% domestic production gap between what we need and what we are capable of producing (and when I say "we", I mean USA production, which, by the way, is at max capacity).
So, I know this is master of the obvious, but the importance of ASHG's huge capital expenditures is starting to come into play. ASHG dropped some serious cash the past couple of years ($200M+, I think) to build a brand new plant in Nevada and to upgrade an existing Arkansas plant to double production. These expenditures and plant upgrades will start hitting the street in 2008. I must admit, I have not extensively researched the playing field, but I have not seen other cement companies, at least USA companies, investing in new plants the way ASHG has. CX, for instance invested heavily in 2006 in new expenditures, but since they are based in Mexico, I am unsure of the locations of these expansions and what they plan to use the new production capacity for.
So, short and simple, here is my point. There is big talk about buyouts in the cement industry and big talk about public companies and their EBITDA multiples in comparison to their price in the marketplace. The general consensus, if the FRK and RIN multiples are real, is that there is upward room for cement companies to move up. However, we have one problem and gaping hole in the logic.
It is clear the USA needs more cement and more domestic production. There will be lots of cement sold in the coming years, so for instance when Vulcan Materials (NYSE: VMC) pays and arm and a leg for FRK, well, VMC wants to control that cement production. Fair enough - VMC will have more product to sell. However, in the big picture, the only way to have more cement is to make more; and if we are at max production capacity today, the only way is to increase production capacity by building new plants and expanding existing ones.
ASHG is doing this - the other companies do not appear to be doing so as aggressively. The other US based companies are looking to acquire existing production - which allows them as an individual company to produce more cement and sell more, but it does not cause the 25% need vs. capacity gap to close. ASHG's new plant in Nevada and expanded plant in Arkansas have the potential to fill some of that gap, or in a worst case scenario (well, good if you are me and an owner of ASHG), merely support the gap and make sure it does not widen further, which is a definitive possibility.
Short and simple, the need to make more cement is being solved by ASHG and not many others at least at the level they are committing to. ASHG's expenditures will put more cement in the marketplace and they will own and control that gap-filling capacity. This bodes VERY well for shareholders of ASHG and my take is that this could have some serious upward effects on ASHG's stock price and dividend payouts, especially in late 2008-2009.
Furthermore, although financial information on ASHG is relatively limited in terms of availability, since they are not subject to SEC filings, I think they are in great position. Many cement companies are heavily leveraged with debt to help finance their business growth, partially due to the pressure Wall Street puts on these companies to grow earnings, etc. ASHG is not exposed to that pressure, and while they do carry debt, naturally, I would imagine that the combination of the lack of pressure and the genuine owner mentality (family owns 90% of stock), means that they are far more conservative in terms of their debt load. Simply put, better cash position, better cash flow, better rewards to owners and shareholders.
ASHG has had a great run up in the past few years, yet they still remain somewhat of a secret. I am not sure if the secret will get out or not, but ASHG is a big winner and I forecast that over the next 3-5 years, they will outperform their competitors, especially their USA competitors. Remember, they are already the largest USA owned company - and they are about to get larger. They will help support and close the domestic production gap, especially as cement becomes a more valuable commodity and we see more and more of it go to other countries.
I meant it when I said I am planning to perhaps as much as double my position in 2007 - maybe more. We'll see. My girls need more, too.
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