JHIUF - The Monarch Cement Company: A Solid Play To Cement Into Your Portfolio

2023-12-18 17:19:52 ET

Summary

• Monarch Cement is a small company with a market capitalization of $583 million that may be overlooked by investors.
• The company produces and sells portland cement, primarily used in the production of ready mixed concrete.
• Despite economic concerns, Monarch Cement has achieved growth in revenue and profits, making it a solid investment opportunity.

Some of the most interesting prospects are those that are overlooked by most investors. Sometimes, you need to dig really deep into a list of companies before something truly appealing comes across your radar. One firm that is quite small that came across my radar in this manner is The Monarch Cement Company ( OTCPK:MCEM ). Although the business has a market capitalization of $583 million as of this writing, its shares trade on the pink sheets as opposed to a major exchange. This might cause many investors to miss out on what looks to be a rather decent opportunity. Despite broader economic concerns, management continues to achieve attractive growth for the firm, both on its top line and on its bottom line. Although shares are not as cheap as shares of some other firms that are similar to it, they are still cheap on an absolute basis, and forward earnings look particularly appealing. And on top of this and attractive balance sheet, and I would definitely classify Monarch Cement as a solid ‘buy’ candidate at this time.

A niche firm worth considering

According to the management team at Monarch Cement, the enterprise operates as a producer and seller of portland cement. This is a type of cement that is distinguished by a specific chemical process that makes the cement different than natural cement. Its primary use is as a component utilized in the production of ready mixed concrete that is often used on highways, bridges, and even, in some cases, building construction.

Monarch Cement Begins the process of producing portland cement by quarrying clay and limestone, then crushing, drying, and blending those raw materials appropriately. Assuming this process is done appropriately, the raw materials are then heated in a kiln to 2800°F that then results in the forming of a new compound that the industry calls ‘clinker’. From there, the company adds some gypsum, at which point the next step is to ground the clinker into what management calls a ‘very fine powder’ that is classified as portland cement.

Geographically speaking, Monarch Cement is a very concentrated company. The company largely focuses on marketing throughout Kansas, Iowa, and parts of Nebraska, Missouri, Arkansas, and Oklahoma. This includes some rather large metropolitan areas like Des Moines, Kansas City, Missouri, Omaha, Wichita, Tulsa, and others. Included in the sale of ready mixed concrete, the firm also sells various concrete products and sundry building materials.

In recent years, management has done a good job growing the company's top line. Revenue has expanded in each of the past three years, climbing from $188.8 million in 2020 to $232.6 million in 2022. The company's top line has benefited from a combination of higher shipments and higher pricing. From 2021 to 2022, for instance, the firm’s Cement Business grew by $19.4 million, with $9.7 million of that rise driven by an 8% increase in volume sold and the other $9.7 million attributable to higher pricing. Ready mixed concrete sales managed to drop by $2.4 million because of a 3.4% drop in cubic yards sold. However, this was more than offset by a $4.7 million contribution driven by higher pricing.

With the rise in revenue came higher profits as well. Net income rose over this window of time from $34.8 million to $40.9 million. Operating cash flow inched up from $47.2 million to $49 million, while EBITDA for the company expanded from $58.3 million to $67.9 million. Growth for the company has continued into the current fiscal year. Revenue of $194.6 million in the first nine months of the year beat out the $169.4 million reported one year earlier. Net profits almost doubled from $26.3 million to $50.4 million. And as the chart above illustrates, both operating cash flow and EBITDA increased year over year as well.

Data about the industry as a whole is rather difficult to come by. Fortunately, there is one organization that has a great deal of it. That organization is known as Global Cement. Now to be clear, a lot of the data I have drawn from them discusses concrete as opposed to cement. There are some differences. For instance, cement is actually the binding agent that is then mixed in with water, sand, and rock, that ultimately creates concrete. But because of how integral cement is in the existence of concrete, I view the two as essentially the same for commercial purposes.

According to Global Cement, the US is currently the second largest producer globally of concrete. In 2021, the most recent year for which it has data, the country was responsible for 3.5% of all concrete production. That places it comfortably ahead of India at 2.3%, but significantly behind the 34% produced in China. Just like most other commodities and simple compounds, China has grown to be the dominant player in recent decades. Domestically, when it comes to demand, the most recent data that the organization has comes from the end of July when they reported that consumption of cement in the US dropped 4.3% year over year in the first five months of this year. Clinker production, meanwhile, was down 2.1%. So it really is surprising to see Monarch Cement fare so well.

We don't know what to expect for the rest of the year. But if we annualize results experienced so far, we should expect net profits of $78.4 million, adjusted operating cash flow of $76.7 million, and EBITDA of $87.7 million. Using these data points, I was able to value the company as shown in the chart above. As you can see, shares look substantially cheaper on a forward basis. But even if we assume that this is a blip on the radar, the stock is not particularly expensive. In the table below, I compared the data from 2022 to five similar firms. Using both the price to earnings approach and the price to operating cash flow approach, I found that two of the five companies were cheaper than our prospect. This number drops to only one of the five when we use the EV to EBITDA approach. And if we were to use the forward estimates, Monarch Cement would actually be the cheapest across the board.

Takeaway

Based on the data provided, I would argue that Monarch Cement makes for an interesting prospect for investors to consider at this time. Management continues to grow the enterprise at a nice clip, even when the industry is experiencing weakness. Shares are cheap, both on an absolute basis and relative to similar firms. Add on top of this the fact that the company has no debt on its books and enjoys $37.8 million in cash and cash equivalents, and I definitely think that it is an opportunity that is worthy of a ‘buy’ rating.

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