BOOM - The Bottom Fishing Club: DMC Global

2023-07-24 13:05:38 ET

Summary

• DMC Global's operating performance is hitting on all cylinders, with little credit from investors.
• A 50% discounted valuation to 10-year averages is noteworthy and hard to find in today's overvalued stock market.
• An excellent, liquid, and conservative balance sheet, with strong free cash flow generation/yield is desirable for every investment portfolio.
• Trading momentum in the stock appears to be reversing to the upside since June.

DMC Global ( BOOM ) is a steel fabrication company that has underperformed the U.S. stock market for many years, with a valuation and balance sheet getting more interesting by the day. My bottom-fishing trading formulas, looking for a reversal in momentum after a long span of price decline, are signaling a bullish turnaround as highly probable the rest of 2023.

If you are searching for a "hidden gem" smaller capitalization equity, with a minor following on Wall Street, strong value characteristics, and a technical trading setup on the charts way overdue for an advance in price, DMC Global should be near the top of your research list in July.

The Business

The company is an important supplier of engineered products for construction, energy, industrial processing, and transportation markets worldwide. DMC Global is based in Colorado with extensive assets in the U.S. and Europe. It operates three divisions: Arcadia , DynaEnergetics , and NobelClad .

Arcadia manufactures and sells building products, including exterior/interior framing systems, curtain walls, windows, doors, and interior partitions; architectural framing systems and sun control products; sliding and glazing systems; plus, steel, aluminum, and wood doors/windows. DynaEnergetics manufactures and sells perforating systems, with associated hardware somewhat critical for the oil and gas drilling industry. NobelClad produces and sells explosion-welded clad metal plates for heavy construction applications like corrosion resistant pressure vessels and heat exchangers for oil and gas. Industries served include chemical and petrochemical, alternative energy, hydrometallurgy, aluminum production, shipbuilding, rail car manufacturing, power generation, plus industrial refrigeration.

Below is a slide summary of its products and sales generation taken from the company's June 2023 Investor Presentation .

Financial Summary

Management outlined the solid progress made last year at the business in its March 2023 Stakeholders Summary report,

Our consolidated 2022 sales were a record $654.1 million, up 31% from pro forma sales in 2021. Our 2022 results included approximately $300 million in sales from Arcadia. Excluding Arcadia, consolidated sales were $354.5 million, up 36% from 2021.

Consolidated gross margin increased to 28% from 23% in 2021. The improvement principally reflects higher sales volume at DynaEnergetics on fixed manufacturing overhead expenses, as well as contributions from Arcadia’s higher margin product sales.

Net income attributable to DMC was $12.2 million, or $0.721 per diluted share, versus a net loss attributable to DMC of $(0.2) million, or $(0.26) per diluted share, in 2021. Adjusted net income attributable to DMC, which includes $22.4 million in non-cash amortization expense, was $13.5 million, or $0.70 per diluted share.

Adjusted EBITDA was $93.0 million. After distributing 40% of Arcadia’s adjusted EBITDA to its minority interest holders, adjusted EBITDA attributable to DMC was $74.2 million, up 268% versus 2021. We generated cash flow from operations of $44.9 million, versus cash used in operations of $12.8 million in the prior year.

We reduced our debt-to-adjusted EBITDA leverage ratio to 1.69 at December 31, 2022, from 3.0 at the end of 2021.

Valuation Statistics

On most valuation calculations, comparing price to underlying company fundamentals, DMC Global has reached or is trading just above 10-year lows for new buyers/holders of the stock. Using trailing operating results, BOOM is a clear-cut bargain, especially if sales, income, and cash flow continue to grow as forecasted.

Price to earnings near a 15x multiple, sales of 0.5x, and cash flow of 6x are selling at a greater than 50% discount to decade averages as a group. In addition, with a cost-accounting book value number of $19.39 per share, the current share quote of $18.33 is quite appetizing for the "deep value" fishing crowd.

When we include debt and subtract cash holdings from equity capitalization to create enterprise value, an equally-cheap ownership setup for new buyers appears. Trading around 7x EBITDA and less than 1x sales, DMC Global is again selling at a greater than 50% discount to long-term norms.

I am not saying we will outline the same performance gain as early 2016 to the middle of 2019. But, the last time BOOM was anywhere near this inexpensive, price ran +900% higher during the next 45 months.

Of course, Wall Street pricing is always looking ahead, not backwards. This is where the DMC Global buy proposition gets really exciting. If we can avoid a deep recession, operating results are projected to rise nicely during both the rest of this year and all of 2024!

On forward 1-year estimates, BOOM is priced at an incredibly low 8x earnings and 0.45x sales. To me this is a monster disconnect between the market pricing of shares and a liquid balance sheet becoming flush with cash. At the end of March, current assets of cash, receivables, and inventory at $325 million were almost the same as ALL liabilities outstanding at $334 million. As cash flow is expected to increase into 2024, what will management do with its good fortune to increase shareholder value?

Technical Momentum Picture

Another reason for optimism is the stock trading chart. Sliding from $28 a share in March, fears of a recession hurting heavy construction industries have encouraged sellers. Oil services stocks have also taken a hit this year, after the boom oil/gas period of 2022.

Nevertheless, a soft landing in the economy, supporting another major advance in oil/gas prices, could be the medicine for a turnaround in investor sentiment regarding DMC Global. And, some real evidence of buyers reappearing can be seen since June on the 18-month chart of daily price and volume changes below.

The share price is back above its 50-day moving average, with the 200-day just 6% away from today's $18.33 quote. Until May, the Negative Volume Index relayed overhead supply problems on the whole chart. Yet, buying on weakness (accumulation) may have moved this indicator into a more bullish position over the last eight weeks (marked with red arrow).

In addition, I like the very low 28-day Average Directional Index scores under 10 this summer (circled in green). Such a setup often indicates a low-volatility supply/demand balance in trading, right before a breakout move of buyers overwhelming sellers.

Lastly, the 20-day Chaikin Money Flow calculation has reached a very high (bullish) reading twice since June. Taking all of the mentioned indicators together, an intermediate-term bullish outlook is my readout conclusion, based on thousands of similar pattern developments I have researched over many years.

Final Thoughts

Insider buying is present, with management receiving and keeping stock transfers from the company vs. very few sell orders in the open marketplace, especially over the last three months.

Nearly a record for the company, "free" cash flow generation of $1.92 per share has occurred over the trailing four quarters, working out to a FCF yield above 10%. The bullish news is free cash flow should bump higher into 2024, if Wall Street forecasts play out as expected. And, with a conservative balance sheet in place, the unanswered question is what will management do with the surplus of cash coming in the door daily?

My recommendation is the stock can be viewed as such a relative bargain, a substantial share buyback plan should be implemented immediately. This step would almost surely draw attention to the stock, directly help price to climb with management's extra buying injected into today's share supply/demand balance, while existing shareholders would receive a "leveraged" boost to future ownership results without taking on debt.

However you slice it, DMC Global is a small-cap investment with a variety of positives moving in the right direction during July 2023. Strong operations, a clean balance sheet, serious undervaluation, and a stock quote overdue to rebound are a hard combination to find in today's overvalued stock market generally.

I am projecting a worst-case recessionary environment will only be able to pull the share price to $15, because of its superb balance sheet, existing growth profile, and already bargain valuation going into 2024. Versus theoretical downside of -20% for investors, upside potential is stacked in your favor at many multiples of the risk number. For example, to reach a "normalized" valuation on trailing results, a price advance of +100% would be necessary. And, if operations continue growing as predicted by analysts, the stock may have to rise beyond +150% in price to reach "overvalued" territory in 12-18 months.

I rate shares a Buy , with a 1-year price target of $30, which would return about +65% on your investment capital.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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