Diary of a Financier

Quant screen: Core Value (October 2013)

In Trading Desk on Mon 28 Oct 2013 at 18:29

My Core Value screen scored the following names as the highest ranking outputs on 10/23:

  1. Argan Inc ($AGX)- watch
  2. American Railcar Industries ($ARII)- bought 6/10
  3. Foot Locker ($FL)- bought 4/30
  4. Westjet Airlines ($WJA.TO)- watch
  5. Advanced Semiconductor Engineering ($ASX)
  6. Dillards Inc ($DDS)- vetoed
  7. Valmont Industries ($VMI)- new, bought 10/25
  8. Standard Motor Products ($SMP)- bought 9/4

Core Value 2013.10.23

To end last week, I opened a new position in VMI.  I took the entry point created by its 15-minute complex Head & Shoulders bottom, which should rally from here to breakout >$139 neckline resistance.  More importantly, VMI’s primary pattern is a daily, long term bull flag with 3x bull divergence.

In light of our involvement, I wanted to highlight Valmont herein to crystallize my mindset.

VMI produces fabricated metal products, primarily in the US, Australia, China, France, and emerging markets. It operates in four segments:

  • Engineered Infrastructure Products (EIP)- manufactures metal structures and components for lighting and traffic, wireless communication, roadway safety, and access systems applications (e.g. steel & aluminum poles, towers, and other structures)
  • Utility Support Structures (USS)- manufactures engineered steel & concrete structures for electrical transmission/distribution lines and related power distribution equipment
  • Coatings- provides galvanizing, anodizing, powder coating, and e-coating services
  • Irrigation- produces mechanical irrigation equipment and related service parts under the Valley brand for the agriculture industry

They serve state & federal governments, large farms, contractors, utilities, telecommunications, commercial lighting fixtures, and general manufacturing sectors.

Since VMI reported 3q13 earnings on 10/17–missing on the top and bottom lines–I had a nice opportunity to dive into its quarterly conference call transcript, in which management had a frank discussion about their industry’s outlook.

Overall, they expect a couple of the various global industries in which they traffic to face decelerating growth–concurrent with forecasts from organizations like EIA and EEI.  However, VMI says it will buck global headwinds due to an idiosyncratic situation: they didn’t have the capacity to serve their backlog in 2013, so the $50-100mm in projects they had to defer in 2h13 still remain for the 2014 pipeline.  Next year, they’ll have the capacity to serve these orders, due to investments made in new plants.  VMI’s management team also suggested that it’s prepared to maintain growth in a poor macroeconomic environment by taking outsourced projects/products in-house.

Their Irrigation segment seems like it’ll be a bit of a drag.  US agriculture had a weak 2013, but farmers’ outlooks are still positive, which helps–although VMI themselves are a little less sanguine.

As far as their Coatings segment goes, low volatility in steel/zinc/natural gas prices is important to help them pass costs onto customers.

VMI’s acquisition pipeline exceeds $1B.  Management has been adamant that they won’t acquire anyone that’s not immediately accretive to EPS; specifically, ROI must exceed their cost of capital (~8.5% after tax).  That recurring growth contribution is why they prefer M&A to share buybacks, which is music to my ears.  They have a nice gross cash position from which they can handle some of these initiatives.

In 2014, management guides towards flat y/y CapEx ($100mm) before lowering to $50mm run-rate thereafter.  That downshift will be a nice boost to free cash flow, which already yields 4.71%.

VMI’s well diversified business lines are well diversified geographically too.  They’re glad to have a new foothold in India, but it sounds like that locale won’t move the needle for a couple years.  They’re at the epicenter of China’s 4G telecommunications buildout, which growth is real and accelerating.  In Latin America, VMI is optimistic on their Brazilian assets, and their new investment in Argentina “provides a substantial opportunity.”

Aside from the technicals and fundamentals, what I love about VMI is the thematic sleeve it fills for me.  Among its businesses in fabricated metals, electrical transmission, and highway/utility/telecomm infrastructure, VMI addresses a handful of the “genuinely” oldest items in our aging, domestic capital goods.  There’s also substantial catalyst in the US Highway Bill signed into law by President Obama in 2012–once the government gets around to deploying funds with more visibility than the current, non-committal, month-to-month basis.

Short interest in VMI spiked fm <1% in May to >7% now, with 6+ days to cover.  PE has steadily slid down from >24x in 2011 to 12.8 now–near alltime lows.  Insiders have been slightly accumulating too, with insider ownership increasing +2.44% over the last 6 months (for what it’s worth).

VMI fundamentals & chart (2013.10.28)

~~~~

Here’s the performance to date (intraday) of unrealized positions still open from prior screens; buys executed when documented herein & in prior entries:

$ARII +18.60%
$BMA -5.23%
$FL -0.28%
$FXCM +2.14%
$GCO +13.29%
$HCI +6.77%
$IBKR +23.75%
$JOSB +14.80%
$SMP +13.41%
$VMI +0.16%

Here’s my final followup on the last Core Value screen 9/20:

Passive +7.58% (alpha= +4.35)
Active +8.16% (alpha= +4.93)
SPX +3.23%

Core Value 2013.09.20_Update

Here’s an interim followup on the Low Enterprise Value screen run 10/8:

Active & Passive +11.89% (alpha= +5.40)
SPX +6.50%

Low EV 2013.10.08_Update

–Romeo

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  1. […] Here’s a followup on the last Core Value screen 10/23: […]

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