2023-04-25 10:22:00 ET
Summary
- USLM has been hoarding cash, and now with interest rates increasing, the company is finally making money on its cash pile.
- About 60% of the FY 2022 net interest income was generated in the last quarter. Expect the net interest income this year to more than double.
- The underlying operations remain strong, but let's wait to see how the company is impacted by the economic uncertainty this year.
Introduction
As explained in a previous article , US Lime & Minerals ( USLM ) produces lime and limestone products from its quarries. The company’s output usually ends up in the construction sector or gets sold to paper and glass manufacturers. As the company has a large net cash position , I wanted to follow up on the advantage of having a cash pile in an increasing interest rate environment. And indeed, USLM’s net interest income increased sharply toward the end of this year which means the company may very well generate north of $1/share in pre-tax net interest income this year.
Looking back at the 2022 results, while zooming in on the cash pile
It goes without saying 2022 was a good year for US Lime & Minerals as the company saw its revenue increase by more than 20% to just over $236M . Unfortunately the operating expenses also increased, by about 30%, and this means the $47M revenue increase translated in a gross profit increase of just $11M. And as the SG&A expenses also increased, the operating profit increased by just under $8.5M compared to 2021.
That’s understandable considering USLM obviously wasn’t immune to inflation and it appears unlikely the labor costs will come down anytime soon so investors will likely have to adapt to this new reality.
Fortunately the high inflation rate and the increasing interest rates work in USLM’s favor. The large cash pile means USLM was able to generate a (minimal) net interest income in 2020 and 2021, but as interest rates increased throughout 2020, the net interest income became more meaningful.
As the income statement above shows, the company generated almost $1.8M in net interest income and on an after-tax basis, this represented approximately $1.3-1.4M and represented a boost to the earnings profile of approximately 25 cents per share. The total reported net income during 2022 was $45.4M or $8.01 per share.
Interestingly, about 60% of the full-year net interest income was actually generated in the last quarter of the year. The $1.15M in net interest income in Q4 represented almost 9% of the pre-tax profit. That’s good to know, because this means the annualized net interest income has currently hit a run rate of approximately $4.6M (which is more than 2.5 times higher than the reported net interest income during 2022).
And thanks to the combination of a decent operating result and the attractive net interest income, the cash flow performance of USLM was very robust as well.
As you can see below, the company reported an operating cash flow of $64.4M. This included a net investment in the working capital position of approximately $8.1M resulting in an underlying operating cash flow of approximately $72.5M. Keep in mind about $2.6M of the tax bill was deferred so if we would include the impact of a normalized cash tax payment, USLM generated about $70M in operating cash flow.
The total capex was less than $27M, resulting in a free cash flow result of $43M. That’s lower than the reported net income as the total investment level of almost $27M is higher than the $22.2M in depreciation and amortization charges.
About $5.6M of the free cash flow was used to complete the Mill Creek acquisition. Mill Creek is a dolomite mining and production company in Oklahoma and USLM expects this acquisition to complement the existing geographic footprint.
As of the end of last year, United States Lime & Minerals had a net working capital position of approximately $174M with just over $133M in cash (and no debt). Considering the current share count is approximately 5.68M shares, USLM has just over $23/share in net cash.
Investment thesis
So while the company is trading at approximately 20 times its earnings in 2022, keep in mind the enterprise value is substantially lower and the enterprise value versus earnings ratio is approximately 17 (the earnings still include the net interest contribution). USLM pays a small dividend ( 20 cents per share on a quarterly basis ), the majority of its incoming free cash flow is just added to the already robust cash profile (and of course, sometimes USLM is able to pursue acquisitions).
As I expect the net interest income to increase by roughly $3M this year, USLM is now (finally) making money on its large cash pile. But the downside is obviously that the humongous cash pile is also evidence of an inefficient balance sheet. Should (a substantial portion of) the cash balance be distributed to the shareholders, the shareholders could redeploy it elsewhere and generate a higher return.
I have no position in United States Lime & Minerals.
For further details see:
United States Lime & Minerals: Earning Interest On The Cash Pile