Warning - this is quite illiquid due to significant insider holdings. Nonetheless I think it's interesting for those who can look at smaller names.

 

USLM is a deep value hard asset play with a fortress balance sheet (no net debt) with strong cash-flow generation in an industry with significant pricing power and local monopolies.  It primarily sells lime and limestone products (pulverized limestone, quicklime, hydrated lime & lime slurry) in Texas, Arkansas, Colorado, Louisiana and Oklahoma.  Management has skin in the game and an excellent record of generating value for shareholders.   The company trades at very attractive multiples relative to peers (such as aggregate companies) at 6.2x 2010 EV/EBITDA and 10x 2010 FCF and 5.1x our 2011 EV/EBITDA versus peers at 12-17x (MLM, VMC, etc).  We believe the company is worth $70 in 12 months which implies significant upside (75%).

 

The drawbacks are:

• Limited free float ($255mm market capitalization, but ~60% insider ownership) makes this more appropriate for smaller funds/PAs.
• There are no near term hard catalysts to drive the stock in the short term.

However, management has done an excellent job compounding value over time and the valuation is attractive enough to justify a position.

 

Lime Industry

USLM's products are used in steel production, flue gas desulfurization, chemical & industrial applications, highway construction, sanitation treatment and agriculture.  We strongly recommend reading the USGS information on the lime industry.  This provides excellent volume, pricing and market share information.

http://minerals.usgs.gov/minerals/pubs/commodity/lime/mcs-2011-lime.pdf

 

Salient Statistics-United States:	2006	2007	2008	2009	2010e
Production	21,000	20,200	19,900	15,800	18,000
Imports for consumption	298	375	307	422	430
Exports	116	144	174	108	150
Consumption, apparent	21,200	20,400	20,000	16,100	18,000
Quicklime average value, dollars per ton at plant	78.1	84.6	89.9	102	105
Hydrate average value, dollars per ton at plant	98.3	102.4	107.2	126.4	130

 

The key takeaways from the report are the following:

• The industry is consolidated with the top 4 players controlling 80% of production. USLM is the fifth largest player.
• Given the cost per ton of Lime (approximately $120/Ton) is very low, Lime is inefficient to transport significant distances (greater than 300 miles) and local players have very strong pricing power. This can be seen by the pricing over time as the industry has consolidated - in addition the industry was able to pass a price increase in Oct 2008 in the middle of the recession.
• Industry volumes have not recovered from the 20mm ton run rate prior to the recession (18mm tons in 2010). A rebound in domestic steel manufacturing and construction will lead to more normal volume levels in the years ahead.
• We have heard from industry sources that some business is still re-pricing and that price increases are sticking

 

Company Information

USLM has over 300mm tons of proved and probable lime reserves on properties they own or lease. With an enterprise value of $260mm this is less than $1/Ton EV and less than 1% of the current sales value.  However, given the long reserve life reserve (about 300 years at current production rates) it is not appropriate to view USLM on a Net Asset Value basis (although the results would show fair value significantly higher than the current price).

 

The company has done a very good job increasing production over the past 7 years.  They have done a few accretive tuck-in acquisitions which have helped to solidify their position in the Texas and surrounding areas.  The company has increased book value per share from 7 dollars to 20 dollars in the past 8 years via retained earnings.

 

Natural Gas

The company also receives income from natural gas royalties on their property.   While this is a small portion of the business (7.4mm of revenues and 4.8mm of gross profit in 2010), it provides a free option on natural gas pricing.  Future estimated net revenues are $71mm, though this number may fluctuate with future exploration and changing commodity prices. The company does not operate this business.

 

Insiders

The company is controlled by a majority shareholder Inberdon Enterprises (57%) who have one board seat.  Two other shareholders own in aggregate 24% of the shares outstanding.  Management compensation is in line with comparable companies and modest. This level of concentrated ownership gives us confidence that capital will be allocated wisely, and a review of the last ten years of operations backs up this view, with double digit compounding of book value per share and returns on retained earnings.

 

Valuation:

 

Our base case model is below.  The key variables are revenue growth of 8% in 2011 and 6% in 2012 via a combination of price and volume increases.  Our price target of $70 per share assumes USLM still trades at a discount to its peers in the aggregates business.

 

Note: Our assumption of no productive use of cash-flow is very conservative given the companies historically smart use of cash and acquisition strategy.  Any accretive transactions will lead to a higher valuation.

 

Finally, although we don't believe that a takeover is imminent, we think that USLM would be an ideal fit for any of the larger industry players.

	2006	2007	2008	2009	2010	2011	2012
Revenues	$118.7	$125.2	$142.4	$117.3	$132.6	$143.2	$151.8
EBITDA	31.2	31.3	36.8	34.4	41.3	44.6	47.3
Depreciation	(10.1)	(12.9)	(13.5)	(13.5)	(13.6)	(14.7)	(15.6)
EBIT	21.1	18.4	23.3	20.9	27.7	29.9	31.7
Interest	(2.9)	(4.1)	(3.9)	(2.9)	(2.6)	(2.4)	0.3
GAAP TAX	(4.9)	(3.9)	(5.0)	(4.5)	(7.0)	(7.7)	(9.0)
EPS	2.09	1.64	2.26	2.13	2.84	3.11	3.62
FCF/Share	(1.4)	1.0	1.6	3.9	3.9	4.6	5.3
			EV/EBITDA		6.37	5.24	4.23
			P/FCF		10.45	8.89	7.73

No catalyst. It's cheap, insiders have skin in the game and historically they deploy capital well.

You won't be able to trade in and out of this in any size, so you need to be comfortable holding it.