2023-08-10 13:47:01 ET
Summary
- Valhi, Inc.'s share price has been consistently declining, with investors losing over 70% of their initial investment in the past year.
- The company operates in the specialty chemicals industry and has shown decent growth in both top and bottom lines.
- Valhi's diversification across industries and global presence provide some stability, but the company's low return on assets and declining sales volumes are concerning.
Investment Rundown
The share price performance for Valhi, Inc. ( VHI ) over the last 12 months has been detrimental. The share price has consistently been trending downwards and investors back in August last year would have lost over 70% of their initial investment. But is the time to get in right now, when the share price has had such a steep decline? In my opinion, I still think it's too early but there seems to be a lacking downside risk here that would make the company a sell otherwise.
Operating in the specialty chemicals, VHI has diversified its revenue streams rather well but the chemicals segment of the business still makes up the vast amount of revenues. The last report from the company showed an ability to grow the top line decently, but grew the bottom line even better, reaching $42 million in net income. This isn't sufficient to change my mind about the company's rating and a hold will still be advised.
Company Segments
VHI operates across a diverse set of industries, spanning chemicals, component products, and real estate management and development, with a global presence covering the Asia Pacific, Europe, North America, and international markets. One of its notable segments, the Chemicals division, plays a pivotal role in producing and marketing titanium dioxide pigments (TiO2). This white inorganic pigment holds significance across a wide spectrum of applications, prominently finding its place in the manufacturing processes of paints, plastics, decorative laminates, and paper.
The price of the product has largely been the driving force behind the company's ability to grow revenues and earnings. VHI also has a small dividend at 2% which has been possible because of very solid market prices for the commodity, making VHI able to raise prices and pass down earnings. However, it seems that the market conditions aren't that favorable, at least not in the eyes of the market as the share price has been declining quite a lot.
Looking at the last earnings report from the company they continued to show that the vast majority of revenues come from the chemicals segment. Apart from this though, they are also generating some from component products and real estate management. A diversified business to say the least.
The company holds around $1.5 billion in gross property, plant & equipment and makes up more than half of the total assets. Looking at how VHI has been able to leverage the assets they hold into stronger returns the ROA sits at 1.47% right now, which is quite a bit below the 5-year average of 4.36%. This indicates to me that VHI has been struggling to get the most out of what they own and turn that into stronger top and bottom-line growth. I don’t necessarily see anything that would be suggesting a shift will occur in the near term. This helps contribute to the lower multiple and premium the company receives, as it has to display the associated risks, one of them being declining ROA.
For the second largest revenue source, we have the Component segment which has majority ownership in CompX International (CIX), marking a strategic partnership that fuels its growth trajectory. As the company's operations evolve, a noteworthy pivot has occurred, with a clear emphasis on manufacturing equipment tailored for the dynamic recreational marine industry.
It seems that this is helping the company be able to maintain the dividend which was quite recently announced to be $0.08 per share, putting VHI at a FWD yield of 2.13%. This has me slightly worried as perhaps more capital should be going towards building out new possible revenue streams for making acquisitions.
Risks
The TiO2 market has exhibited remarkable volatility throughout the past decade. This inherent volatility is expected to exert an influence on the company's performance over time. An analysis of historical trends reveals that investing in this stock during its cyclical downturns has yielded substantial returns. However, conversely, deciding to enter the market at the peak of an industry cycle has often resulted in value erosion, underscoring the sensitivity of this sector to market dynamics.
In navigating this challenging landscape, the pivotal factor that emerges is the significance of timing and price entry. The TiO2 market's inherent cyclicality implies that purchasing shares when they are trading at the lower end of the cycle might be a prudent approach, considering the historical returns that have been generated during such phases.
Sector Comparison
It has become quite clear that VHI is trading at quite a discount in comparison to the rest of the market. The p/e for example is at just 9 compared to 14 for the rest, resulting in a discount of 33%. However, when we look at the historical average for the company, it sits quite close to where VHI trades right now. In my opinion, it seems that VHI comes out quite fairly valued given the difficulties in the market and the slowing sales volumes it has experienced. This lends itself to deserving a lower multiple and does not necessarily make the company a buy despite the massive downfall in the share price in the last 12 months. Now, I don’t think back then it would have been very wise to suggest a hold rating. It's easy to say that when looking back, but I think for commodity companies like VHI relying on historical multiples and valuations often gets you a long way.
Final Words
The last year's performance of VHI has been anything but positive really and I don’t think we are in for any significant jump in the valuation going forward unfortunately. The company is trading in line with the sector and the last report didn't post anything that would make me want to buy into VHI right now. The sales volumes were under pressure and a volatile market environment continues. This leads to me rating VHI a hold right now instead.
For further details see:
Valhi: Share Price Has Plummeted, Time To Get In?