Description

This morning the company released earnings and held their conference call in case people are interested in getting a ‘hot off the presses’ take on management’s comments and current results.

INVESTMENT THESIS:

The current management team led by the CEO, Cliff Nastas, has spent the past few years disassembling a cobbled together enterprise, shedding non-core, low (and negative) margin businesses, and selling excess real estate. The result is a smaller, good but not great business, that is safe and quite cheap at current levels run by very capable management and backed by a board of directors that is intent on realizing shareholder value and not squandering the considerable cash balance.

Company Description from latest 10Q:

Material Sciences Corporation and its subsidiaries design, manufacture and market material-based solutions for acoustical and coated applications. Our acoustical material-based solutions include composites that consist of layers of metal, rubber and other materials used to manage noise and vibration in such products as automotive body panels; brake dampers; engine parts; appliances; heating, ventilation and air conditioning (“HVAC”) and computer disk drives. Our coated material-based solutions include coil coated and electrogalvanized (“EG”) protective, decorative and rubber coatings applied to coils of metal in a continuous, high-speed, roll-to-roll process for such products as automotive body panels and fuel tanks, building products, gaskets, appliances and lighting fixtures. These solutions are designed to meet specific customer requirements for the automotive, building, consumer and industrial markets.

BUSINESS SEGMENTS;

The company has two segments: acoustical material and coated material roughly split 50/50 by revenue.

The acoustical segment sells noise and vibration dampening solutions mainly to the auto and appliance industries. For instance, Whirlpool, when designing a new washer/dryer will come to them and ask for their latest and greatest product to help make their new line quieter than the last. Similarly, Ford, Chrysler, etc are also concerned with the passenger experience in this regard and want body panels that will lessen exterior noise while driving the car.

The coated material segment sells into the same markets but slightly different products. The bulk of the segment’s sales is an electrogalvanized product (reinforced steel) and something trademarked as Electrobright. The company focuses on engineered solutions that increase the strength, durability, and importantly going forward, efficiency of steel (and aluminum) products.

The acoustical segment has been down over the past year or so as General Motors has discontinued several models that contained their Quiet Steel product. Similarly, in the coated segment, Ford has been transitioning their fuel tanks from steel to plastic.

The management team has been exceedingly conservative in their outlook since I began following the company and today’s call gave an interesting glimpse into some potential future growth avenues for the company.  Specifically, the company has spent r&d dollars designing a material that has all the strength characteristic of steel but is materially lighter and will help OEMs meet new federally mandated fuel standards.

The caveat in today’s press release surrounds spillover electrogalvanized business from US Steel (my guess) that the company calls opportunistic. This is basically volume that US Steel couldn’t handle at their facilities and will amount to about 11mm for fiscal ’12. In the release they mention that the customer has recently lost business to a competitor with spare capacity and thus, some of that 11mm is at risk for next year. On the call they hinted at a 20-30% incremental margin on that business but also said that not all is going away and that there is the potential to mitigate the loss with new business from other customers. This plays into my estimates in the following section.

VALUATION:

Market Cap: 88mm

Net cash: 28mm

Enterprise Value: 60mm

EV/EBITDA ’11: 3.0x

EV/EBITDA ’12: 2.9x 

P/Tangible book: 1.2x

Hidden Value:

Management has conveyed that they are in the process of trying to sell their corporate headquarters which they estimate will fetch 6-8mm or roughly .54-.72 per share.  I expect a sale to occur in the next 6-9 months.

Capital Allocation:

One of the primary risks of a sizeable cash cushion is management's propensity to make acquisitions (often poor ones) if the core business is stagnating. On this, I'm comforted by the following news release timeline:

1/28/11:  Material Sciences Corporation (Nasdaq: MASC), a leading provider of material-based solutions for acoustical and coated applications, today announced that the company's board of directors has authorized the repurchase of up to one million shares of common stock. These one million shares are in addition to the 114,081 shares remaining available for repurchase under the Board's January 7, 2008 authorization. The share repurchases will be made from time to time at MSC's discretion, subject to market conditions and other factors, and will be funded with internally generated cash. As of January 27, 2011, MSC had 12,909,133 shares outstanding.

5/27/11: Material Sciences Corporation (NASDAQ: MASC), a leading provider of material-based solutions for acoustical and coated applications, today announced that the company's board of directors has authorized the repurchase of up to one million additional shares of common stock. All previous authorizations to repurchase shares have been completed. The share repurchases will be made from time to time at Material Sciences' discretion, subject to market conditions and other factors, and will be funded with internally generated cash.

9/14/11: Material Sciences Corporation (NASDAQ: MASC), a leading provider of material-based solutions for acoustical and coated applications, today announced that the company's board of directors has authorized the repurchase of up to 1 million additional shares of common stock. The previous authorization announced in late May 2011 has approximately 230,000 shares remaining to be repurchased. The share repurchases will be made from time to time at Material Sciences' discretion, subject to market conditions and other factors, and will be funded with internally generated cash.

1/12/12  Material Sciences invested $16.9 million to repurchase approximately 2.35 million shares or 18 percent of its outstanding common stock in the first nine months of fiscal 2012. It ended the period with $28.3 million in cash and there were 10,542,659 shares outstanding at December 30, 2011.

Today’s call makes clear that 700,000+ shares remain under the authorization program and that buybacks specifically, and capital allocation more generally, are topics on the agenda of every board meeting.

PRICE TARGET-based on FY13 numbers

EBITDA:  20-21* They lose 6mm of the 11mm in US Steel overflow and win 2mm in new business both at 25% margins

CASH :   28mm current+6mm hq proceeds+ 12-15mm in FCF for ‘13= 46-49mm

SHARECOUNT: 10.54mm (no incremental buybacks)

MULTIPLE RANGE 4-6x

TARGET PRICE: $11.95-$16.60

Risks:

• Auto production, particularly the lines they’re exposed to, is severely curtailed for an extended period of time
• Overflow of US Steel’s EG business comes to a sudden halt and can’t be replaced
• None of their new product initiatives gain traction

Catalyst