US Lime and Minerals (USLM) offers exposure to two separate lines of business
- Lime and Limestone – This is a locally competitive market with largely private players and high barriers of entry, and,
- Natural Gas – The company owns and leases its property in Texas for natural gas drilling. The 3800 acre property sits on the Barnett Shale formation and generates royalty interest for the company
Note: Several members have asked me about commodities and natural gas, and while this is not a pure play natural gas producer, it does give a safe exposure to the natural gas market while balanced with a solid cash flowing business that alone makes this stock a great investment.
Operations, Barriers to Entry and Natural Moat
The lime industry is characterized by high barriers to entry, including: the scarcity of high-quality
limestone deposits on which the required zoning and permits for extraction can be obtained; the need for lime plants and facilities to be located close to markets, paved roads and railroad networks to enable cost-effective production and distribution; clean air and anti-pollution regulations, including those related to greenhouse gas emissions, which make it more difficult to obtain permitting for new sources of emissions, such as lime kilns; and the high capital cost of the plants and facilities. These considerations reinforce the premium value of operations having permitted, long-term, high-quality limestone reserves and good locations and transportation relative to markets.
Additionally in most markets the company competes with small private mines and is able to operate and compete with greater efficiency due to its scale, infrastructure and relationships.
The Company is headquartered in Dallas, Texas and operates lime and limestone plants and distribution facilities in Arkansas, Colorado, Louisiana, Oklahoma and Texas through its wholly owned subsidiaries, Arkansas Lime Company, Colorado Lime Company, Texas Lime Company, U.S. Lime Company, U.S. Lime Company—Shreveport, U.S. Lime Company—St. Clair and U.S. Lime Company—Transportation. It supplies construction, steel, municipal sanitation and water treatment, oil and gas services, aluminum, paper, glass, roof shingle and agriculture industries and utilities and other industries requiring scrubbing of emissions for environmental purposes.
The natural gas segment has no employees. The company owns 3800 acres of property in Johnson County, TX and has leased it to EOG Resources from drilling and production. The company derives an average of 34.7% of revenues generated from the 34 wells on this property as its royalty interest. Additionally, XTO Energy has leases on 538 acres of property contiguous to USLM’s property and pays USLM an average of 12.4% revenue for drilling 6 wells drilled on 2 PAD sites on USLM’s property. As long as these wells keep producing, the company gets paid in proportion of the total production and the natural gas price in the market.
Balance Sheet and Profitability
Bulk of the revenues and profits are being generated through the Lime operations Natural Gas only accounts for about 8% on average. The company boasts a phenomenal 15% ROE and 16% net profit margin that the company has achieved with continuous operational improvements over time. It has also more than doubled its EPS in the last 5 years despite very little change in the revenues. This period, as you recall, spanned the great recession which impacted Steel, Construction and the Housing sectors which are the primary customers of the company.
|USLM P&L History||2011||2010||2009||2008||2007|
|Lime and limestone revenues||$ 129,704||$ 125,169||$ 110,406||$ 126,165||$ 116,569|
|Natural gas revenues||$ 12,878||$ 7,425||$ 6,925||$ 16,191||$ 8,667|
|Total revenues||$ 142,582||$ 132,594||$ 117,331||$ 142,356||$ 125,236|
|Gross profit||$ 41,349||$ 36,041||$ 28,753||$ 31,283||$ 26,016|
|Operating profit||$ 32,503||$ 27,665||$ 20,955||$ 23,317||$ 18,372|
|Income before income taxes||$ 30,144||$ 25,058||$ 18,144||$ 19,411||$ 14,339|
|Net income||$ 22,186||$ 18,040||$ 13,670||$ 14,433||$ 10,446|
|Net income per share of common stock:|
|Basic||$ 3.50||$ 2.82||$ 2.14||$ 2.29||$ 1.67|
|Diluted||$ 3.49||$ 2.81||$ 2.14||$ 2.27||$ 1.65|
|Natural Gas %||9%||6%||6%||11%||7%|
|Net Profit Margin||16%||14%||12%||10%||8%|
At the current price of $46.15/share, the stock trades at a PE ratio of 13.2 or an earnings yield of 7.6% which is almost a 50% a discount to its ROE.
The company has also grown its book value by almost 100% in the last 5 years, and reduced its debt significantly. (How to calculate book value of equity)
|USLM Balance Sheet||2011||2010||2009||2008||2007|
|Total assets||$ 202,558||$ 188,498||$ 172,070||$ 166,129||$ 158,227|
|Long-term debt, excluding current installments||$ 26,667||$ 31,666||$ 36,666||$ 46,354||$ 54,037|
|Stockholders’ equity per outstanding common share||$ 22.94||$ 20.01||$ 17.20||$ 14.87||$ 12.94|
While the stock trades at 2x the book value, it is worthwhile to remember that USLM’s assets such as licenses, approvals, zoning, location on the Barnett Shale natural gas reserves, etc have real value which is not entirely reflected on the balance sheet. For example, the audited and proven natural gas reserves, at the market prices prevalent, fully discounted, are estimated to be about $30 m. When the natural gas is exhausted, the company will be left with a 3800 acre property, which still has value that will likely grow over time. Similar reserve valuation can be done for the limestone reserves and they are not reflected on the balance sheet. In this case, using the Income Statement as a basis for our valuation analysis makes better sense, given the information that is known.
Stock Ownership and Float
The company has approximately 6 million shares outstanding. About 23.75% (Source: Nasdaq) of the stock is held by institutions, and 69% by the insiders (Source: Yahoo Finance), leaving little float. In March, the company repurchased 700,000 shares in a private transaction at an average cost of $58/share (which was at about 2% discount to the market price then), which will further add to the EPS that the shareholders receive going forward from the next quarter on. There have been net insider purchases in the last 3 months at prices much higher then the current market price of the stock. No dividends are paid.
Improving fundamentals in construction, housing, steel, oil & gas and municipal spending will help USLM lift its revenues. Even in the current environment, the business has strong profitability and flows $20 m in cash every year to the company. Further, strengthening of the natural gas prices, long anticipated, will flow directly to the bottom line as the company does not have expenses in this segment and just collects rent.
Bottomline and Valuation
The company considered $58/share a good price to pay when they repurchased their stock in March this year. The stock currently can be bought for $46.15/share, which reflects a 13.2 PE. Historically, the stock has changed hands at prices between 5 and 55 times earnings, with the average being around 17. I recommend paying up to 15 times earnings for its stock which is $52.5/share. For now, plan to sell the stock at $70/share by end of 2014 or less, but this can change if the economic environment or the NG prices improve.
I estimate allocating as much as 10% of my portfolio to this stock.