MTX - Minerals Technologies Q2: Unearthing The Challenges And Opportunities

2023-07-31 12:30:00 ET

Summary

• Minerals Technologies Inc. reported a 1% increase in total sales during Q2 2023 due to higher pricing strategies, but faced challenges such as reduced volumes and negative foreign exchange rates.
• The divestiture of the talc industry introduces uncertainties for the company.
• Concerns over stagnant volume growth, rising interest rates, and limited dividend yield warrant a cautious "hold" rating on the stock.

Thesis

Minerals Technologies Inc. ( MTX ) recently reported its Q2 earnings , reflecting a 1% increase in total sales primarily due to higher pricing strategies. Despite a 12% rise in operating income and improved margins, the company faced challenges such as reduced volumes and negative foreign exchange rates. The divestiture of the talc industry also introduces uncertainties. While some segments showed stability and momentum, concerns over stagnant volume growth, rising interest rates, and limited dividend yield prompt a cautious "hold" rating on the stock, warranting monitoring of its performance in the coming quarters.

Company Overview

Minerals Technologies Inc. stands as a notable player in the specialized mineral product market, with its operations segmented into three divisions: Performance Materials, Specialty Minerals, and Refractories.

Performance Materials focuses on bentonite and leonardite products, serving sectors ranging from household goods to environmental and construction.

The Specialty Minerals segment delivers precipitated calcium carbonate, quicklime, limestone, and talc products, used widely in industries like paper, packaging, pharmaceuticals, and automotive.

Meanwhile, the Refractories division offers a myriad of tailored products and services for industries dealing with steel, non-ferrous metals, and glass.

Minerals Technologies Q2 Earnings Highlights

In the latest financial quarter, Minerals Technologies Inc. reported that total sales for the period reached $552 million, recording a 1% increase from the previous quarter, a minor move that was primarily attributed to the implementation of higher pricing. The company saw a flat sequential volume due to inventory reduction in some sectors, however, the operating income still saw a 12% rise to $71 million. The operating margin also improved by 120 basis points, reflecting effective price increase strategies and efficient management of input costs.

Compared to the previous year, sales slightly dipped by 1%, influenced negatively by unfavorable foreign exchange rates. Nevertheless, when viewed in constant currency terms, there was a marginal year-over-year increase in sales. Several end products and markets, including pet litter, bleaching earth, steel, and foundry, saw an increase in growth. However, certain weaker conditions in project-centric businesses within the Environmental & Infrastructure sector, coupled with inventory reductions in the paper and some consumer markets, contributed to an overall reduction in volumes. Operating income saw a 4% decrease from the previous year, primarily attributable to reduced volumes. One significant achievement was the substantial positive net effect from price versus cost, marking a high point since the start of the current inflationary cycle.

Both the principal segments of the company, Consumer & Specialties and Engineered Solutions, exhibited stability coupled with some momentum in performance. While the Consumer & Specialties segment experienced a 3% rise in sales compared to last year, the Engineered Solutions segment saw a 5% increase in sales sequentially, spurred by a healthy demand for foundry and refractory products in North America and an upturn in activity in Asia, despite soft market conditions in Europe.

Looking ahead, Minerals Technologies projects the performance for the third quarter to remain fairly consistent with the demand for pet litter, bleaching earth, and animal health products is predicted to remain steady with a modest sequential increase in North American paper volumes is anticipated. Further planned pricing actions for the third quarter, along with the cost savings program which is anticipated to yield $10 million in annual saving, are set to bolster the continued improvement of margins.

All in all, the company projects third-quarter operating income to fall within the $70 million to $73 million range, marking a 4% to 9% increase from the previous year, with earnings per share expected to be between $1.30 and $1.35, both lower than the current EPS estimate (see above).

Lastly, existing shareholders are probably already aware that on June 26 , MTX declared that Barretts Minerals Inc., an affiliate of MTI with operative mining territories and rights in Montana, as well as manufacturing bases in both Montana and Texas, will be divesting its operations from the Talc industry. Notably, Barretts' talc division registered net sales of approximately $57 million in 2022, which amounted to 2.7% of MTI’s consolidated revenue.

According to management, they pointed out that contrary to potential assumptions, the decision to exit the industry does not stem from safety issues or product quality concerns with respect to their talc offerings; instead, the decision was primarily driven by the increasingly challenging litigation environment, a pressure not exclusive to the more substantial industry players but also faced by Barretts, albeit tangentially (e.g., JNJ's talc lawsuits ). In other words, given that the talc business represents a relatively minor segment of MTI's expansive portfolio, they deemed it judicious to evaluate the venture's value proposition in the face of the escalating, potential, external issues - predominantly, litigation. Unfortunately, for now, as shared by CEO Doug Dietrich on the conference call, little further details were disclosed, except that the company will give investors updates as the situation develops.

Performance

It's impossible to overlook the fact that MTX's share price has declined in the medium-term (see data below) from USD $68.33 in 2015 to USD $59.46 in 2023 - that's a drop of nearly 13% over an 8-year period, translating to an annualized rate of return of -1.61% without dividends. Now, I'm not blind to the fact that markets fluctuate and companies can go through rough patches; however, when you compare it with the S&P 500 Index's return of 9.78% over the same period, you can see why I'm underwhelmed.

Also, looking at MTX's adjusted earnings reveals a lukewarm picture; that is, over the eight years, the dividend payout ratio has hovered around the 4% mark suggesting that while MTX has been generating sufficient earnings to cover its dividends, there's little room for any substantial increase, especially given the static nature of the payout.

Valuation

The company's Blended P/E ratio sits at 11.87x (see chart below), which, relative to the sector average, signifies that the company is undervalued. This can be taken two ways. Either the market has yet to fully recognize a company's potential, providing value investors an attractive entry point, or the company has fundamental issues that have turned off investors and contributed to its lower valuation.

The Adjusted (Operating) Earnings Growth Rate stands at 3.93%, which, frankly, is not impressive and in terms of income return, MTX offers a dividend yield of 0.34%. Quite frankly, this is rather paltry and unlikely to entice income-focused investors.

Risks & Headwinds

Starting with volume growth , or rather, the conspicuous lack thereof, I'm seeing some cause for concern. Volume growth has remained relatively stagnant, with a negligible increase or decrease. It's crucial to note that this flatness in volume is being exacerbated by destocking activities in some of the company's key end markets. This is a red flag, as flat volume growth could potentially place a significant damper on both revenue and profit expansion, and in a larger perspective, it might undermine the growth trajectory of the business.

Another dimension we're seeing is a $8 million negative hit on sales due to currency fluctuations. In a globalized economy, FX risk is something every multinational has to grapple with, but this unfavorable impact is a stark reminder that the company might need to bolster its currency hedging strategies to guard against such negative impacts in the future.

Next up, let's take a look at the project activity within the Engineered Solutions segment. It seems that this part of the business is moving at a slower pace, particularly within the Environmental & Infrastructure businesses. Lower activity levels could result in reduced sales and income for these segments, and that's something that could further amplify the company's financial pressures.

And one final area of concern is the company's rising interest rates. The average interest rate has increased to approximately 6%, a move of 160 basis points compared to last year that translates into over $4 million of additional interest expense in just one quarter, gnawing at the bottom line.

Final Takeaway

Given the recent performance and future projections of Minerals Technologies Inc., I would rate the stock as a "hold." While there are positive signals like the effective management of price increases and input costs and the expectation of steady demand for certain products, there are significant concerns that limit my enthusiasm. These include the lackluster historical return, below-average dividend yield, the lack of volume growth, and rising interest rates. In addition, the divestiture of the talc industry and its potential legal implications introduce an element of uncertainty. Therefore, I believe holding onto the stock and monitoring its performance over the next few quarters would be a prudent approach.

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