USLM - United States Lime & Minerals: A Fortress Like Balance Sheet But I Am Moving To 'Hold'

2024-01-16 10:30:00 ET

Summary

• USLM's strong net cash position and increasing market interest rates made it an interesting investment, but the share price has since risen almost 50%.
• USLM saw strong earnings in 2023 due to increased demand for its products in the construction industry.
• The company's cash flows remain strong, boosting its net cash position on the balance sheet.

Introduction

Almost a year ago, I argued United States Lime & Minerals ( USLM ) could potentially be interesting as the company was sitting on a very robust net cash position and I expected the interest income to increase given the increasing market interest rates. USLM’s first nine months of 2023 were even stronger than I had hoped but as the share price is now up almost 50% since my previous article, I am moving to a ‘hold’.

The interest income provides a nice earnings boost

As 2023 was a pretty strong year in the construction industry, the demand for USLM’s products (mainly lime and limestone from its quarries) increased as well. The total revenue in the third quarter increased to almost $75M while the operating margins increased. In the third quarter and 9M 2023 respectively, the total COGS was 54.5% and 55.1% respectively compared to 57.5% and 60.7% in the preceding year. As the depreciation and amortization expenses remain very low, the company reported very strong gross profit results as well with $28.2M in the third quarter of 2023.

The SG&A expenses increased but remained pretty reasonable which helped the company to post a 20% increase in its operating income compared to the third quarter of 2022. Looking at the operating income performance in the first nine months of 2023, the operating income increased by in excess of 50%, an impressive result.

I am also pleased to see my expectations to see a higher interest income did materialize. The company records these interest income and expense items as ‘other income/expense’. We see a $1.7M increase on YoY basis and looking at the 9M 2023 results, the total ‘other’ income almost ten-folded on the back of higher market interest rates.

This helped the company to post a net profit of $20.7M in the third quarter and about $57.5M in the first nine months of 2023. This resulted in an EPS of $3.64 and $10.11 respectively given the current share count of 5.7 million shares.

The cash flows also remain strong which is further boosting the net cash position on the balance sheet. As you can see below, USLM reported an operating cash flow of almost $65M and that is despite reporting an investment in the working capital position to the tune of in excess of $12.5M, mainly related to an increasing amount of receivables.

ON an adjusted basis, the operating cash flow was $77M and as the total capex was just over $20.5M, the underlying net free cash flow was approximately $56.5M which is pretty much in line with the reported net income. The capex was slightly higher than the depreciation and amortization expenses recorded during those three quarters and that explains the majority of the discrepancy.

As USLM is paying just nominal dividends on a quarterly basis ($0.20 per share per quarter ), the company generated almost $43M in net cash which was added to the bank account. USLM ended Q3 2023 with a total cash position of in excess of $176M (see below).

The balance sheet indeed remains in a formidable condition. The company has no debt and the non-cash current assets are sufficient to cover all the liabilities (both long-term and short-term liabilities) on the balance sheet. The cash position represents just over $30/share and covers almost half the total book value (which isn’t a good metric for this company considering the fair value of the mining operations is higher than the $172M book value).

Investment thesis

Most companies in the construction sector have guided for a relatively weak Q4 2023 and an equally weak start of 2024 so it will be interesting to see USLM’s performance in the fourth quarter of last year. I am still expecting a positive free cash flow result of $10-15M which would bring the full-year free cash flow to $12-13 per share. This means the free cash flow yield based on the market cap is approximately 6% while the free cash flow result based on the enterprise value is approximately 7.5% (with the caveat that lower market interest rates will also have a negative impact on the free cash flow performance.

At the current share price of just over $220, USLM still isn’t very expensive but I have sold my small position as I wanted to deploy the cash elsewhere. However, I will continue to keep an eye on USLM and would consider getting back in below $200.

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