Description

OilDry Corporation is the largest and low cost producer of wholesale cat litter in the United States; 70% of sales. The Company also produces a number of additional absorbent products whose uses include lawn care (golf) fertilizer distribution enhancement, purification, and automotive (Auto shop absorbent for spills)

The Company owns and leases its main raw materials supplies and by its own estimates has enough material at current utilization rates to ensure production for the next 50 years. The clays used in the Company’s products are not found in large deposits in North America according to the Company. An important manufacturing component (25% to 30% of costs) is natural gas/coal/fuel-oil, which is used to dry out the base material. Gas/coal/fuel oil is interchangeable within the manufacturing process although a majority of gas is used. The company has been selectively interchanging between the different fuels in order to protect itself in case one particular fuel’s price spikes. These three fuels are not instantly interchangeable and there are some barriers to seamless switching such as permits, regulations, facilities, etc. Furthermore, the Company locks in gas prices 6 months forward in order to lower volatility in material costs.

In the late 90’s the company went through some trouble trying to become a someone it was not by trying to get into the retail cat litter business. They built up inventories, advertised heavily and all in all wasted a lot of money figuring out that it was not a good business to be in. Since then the people responsible for the strategy have left Oildry and the Company has refocused on generating cash-flow, something at which they have become very effective.

Investment positives:

Somewhat protected raw material source. ODC has 50 years supply of a material not easily found in North America and given the nature of the material, high transportation costs protect the company somewhat from foreign competition.

Boring business lots of cash-flow. You are certainly not impressing anyone by telling them that you are the largest manufacturer of cat litter in the USA. The Company however has been improving its free-cash flow generation dramatically. They have done this through aggressive cost controls and operating measures such stopping shipments to certain Wall-mart locations where ODC found that it was not making any money.


Revenues EBITDA Free Cas-Flow
2003 173.04 14.48 12.61
2002 162.34 11.99 14.08
2001 160.67 8.98 9.34
2000 171.73 16.09 ~0.0
1999 173.99 20.25 1.06
1998 160.25 19.39 ~0.0

Additionally, the company pays off a nice dividend yield of 3.21% has 34 mln in debt and 15 mln in cash and equivalents.

What attracted me to this company is its valuation. The company has 4.1 mln A Shares and 1.4 mln B Shares outstanding and trades for 12.50 a share for a market cap of approximately 69 mln dollars which translates into a Free Cash-flow multiple of 5 X. The B shares are controlling shares owned mostly by the Jaffee family who founded ODC in 1942. I don’t believe that Free-cash-flow has chance of growing faster than GDP, that being said however does nothing to dissuade me from believing that paying 69 mln for 13 mln in free-cash flow seems extremely attractive to me for a business with some barriers to entry and conservative management. The shares could double or triple from here. A share price of 35 would put the company at a free cash flow multiple of 15 which seems reasonable for this business.

The company has no major litigation problems, has a small pension plan and no liquidity questions considering that the majority of the debt is due post 2007.

Catalyst

Change in market perception.

Looking at the Company’s valuation on a historical basis points to the fact that it has traded at 6 EBITDA; close to where it is trading now. I believe this is a mistaken valuation metric to use in general and in particular for a company such as this with low net indebtedness and low notional capex requirements. If the market understands this and is able to realize the large cash-flow generative properties of ODC, the stock should appreciate significantly from current levels. This appears to be the perfect family business to LBO in the event the family were willing to sell.

Idea diffusion.