SPLP - Steel Partners Holdings: Bottom Line Remains Robust

2023-08-17 08:01:42 ET

Summary

• Steel Partners Holdings L.P. offers a diversified business model and is undervalued compared to similar companies in the sector.
• SPLP operates in various industries, including industrial products, energy, defense, supply chain management, logistics, banking, and youth sports.
• The company's term preferred stock offers a generous yield and provides a unique long-term avenue for investors to generate income.

Investment Rundown

Steel Partners Holdings L.P. ( SPLP ) has been on a steady trajectory upward for the share price but sits relatively low still in terms of valuation. The market cap isn't very big, sitting around the $1 billion mark so the company doesn't get a massive amount of coverage, not here on Seeking Alpha at least. What makes the company so appealing is the diversified business model they have constructed but also the discount you are getting on the share price compared to similar companies in the sector.

The company has a solid history of buying back shares, but it seems that the rising interest rates have made this more difficult as on a YoY basis recently it has been increasing instead and right now sits at 27.6 million outstanding. What has investors interested in the business is the fact the company has issued a term preferred stock with a maturity in 2026 that yields a very generous 6.44% right now. The stability of SPLP has me intrigued enough to rate it a buy right now for investors seeking a well-diversified company.

Company Segments

SPLP with its subsidiaries, has grown its presence across a diverse spectrum of industries, spanning from industrial products and energy to defense, supply chain management, logistics, banking, and youth sports. This broad set of operations underscores the company's multi-faceted approach to growth, harnessing opportunities across different sectors and geographical boundaries.

The company's operations are organized into three various segments: Diversified Industrial, Energy, and Financial Services. Within the Diversified Industrial segment, SPLP demonstrates its ability by manufacturing precious metals and alloys into highly sought-after brazing alloys. Moreover, the company leverages its manufacturing capabilities to produce seamless stainless steel tubing coils, catering to diverse industrial applications. It seems that the vast majority of the revenues are coming from this part of the company has over $300 million of the total $445 million came from there.

Apart from diversified industries being a substantial revenue generator for the company, they make nearly 20% of total revenues from financial services. However, this segment also has a significantly higher EBITDA margin than the others, generating nearly as much EBITDA in the Q1 quarter as the largest segment in terms of revenues.

Preferred Shares Potential

As mentioned previously, the preferred shares that SPLP has are SPLP.PA. These mature on February 7th, 2026, and have an 8.9% YTM maturity which is very appealing.

It's not often you come across opportunities like this so let's dive a little deeper into what it's all about.

The vast majority of preferred stocks fall under the classification of "perpetual preferred stocks." This means that these stocks lack a defined maturity date, allowing them to maintain a perpetual presence in the market. This characteristic underscores their potential to remain available for investment indefinitely, offering investors a unique long-term avenue to generate income.

But seeing we have a term preferred stock opportunity here there is a difference. Unlike their perpetual counterparts, term preferred stocks have a predetermined maturity date, similar to bonds. This feature gives them a noteworthy quality: resilience against the potential impact of rising interest rates, which is something that a lot of investors were seeking protection against last year as they began rising.

So when we finally reach the maturity date, anyone holding the shares will be awarded a decent yield depending on what price you bought it at. The only inherent risk with them is bankruptcy between then and now. However, as we have discovered with SPLP, they remain to be a very financially sound company that continues to generate solid cash flows, $33.4 million in the last quarter.

Risks

In the past, there have been some risks involved with SPLP's ability to successfully seal mergers. In November last year, we got the news that the proposed merger with Steel Connect ( STCN ) had been terminated . This didn't bode well for share price which briefly saw a decline. However, the company shares a quick record and right now sits at levels above those back in November of 2022. What I want to highlight is that SPLP does bring some inherent share price risk if they fail in future mergers. The added volatility might be something some investors would prefer to avoid instead.

Looking at the financials of the company there has been a slightly worrisome trend appearing, in that SPLP is growing its long-term debts rather than reducing them. Besides that, the shares outstanding have also been increasing on a YoY basis. This goes against what SPLP has historically done and I do hope it's not the beginning of something new that will persist. If that is the case then a downrating to a hold might be better instead. Apart from this, the company may also be susceptible to some volatility as it does focus on commodity materials that are prone to fluctuating prices that might produce inconsistent quarter-over-quarter growth for the company.

Final Words

The appeal of being either in SPLP or the preferred shares comes from the stability that it provides. Having a great set of diversity in terms of markets they operate in SPLP has been building up a good balance sheet and continues to generate positive FCF used for eventually buying back more shares.

This doesn't get a lot of coverage and finding a term preferred share opportunity like this with a decent yield is exciting and a great way to hedge against higher interest rates in the market right now. I like the opportunity and seeing as SPLP.PA also had a decent yearly dividend yield which adds to the buy case further.

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