Reddy Ice, Ice, Baby

Reddy Ice (NYSE: FRZ  ) makes its icy cold cash by selling ice -- lots of it. Indeed, in 2005, it sold more than 1.9 million tons of ice. That's three times the amount of its closest competitor, apparently. This cool company posted a very hot third quarter, with no sign of a meltdown in sight.

Ice is a profitable business, if a boring one, since demand is driven mainly by population growth. However Reddy Ice has been a near-serial acquirer of competitors to boost revenues and profits. It has snapped up more than 100 companies since 1997, including its namesake Reddy Ice, to become the largest supplier of ice to customers like ExxonMobil (NYSE: XOM  ) , Kroger (NYSE: KR  ) , The Pantry (Nasdaq: PTRY  ) , and Wal-Mart (NYSE: WMT  ) , which alone composes about 11% of sales.

Revenues for the third quarter were basically flat year over year, at $126.1 million, compared to $126.6 million last year. Last year's results were inflated by the spike in demand for ice last year in the aftermath of Hurricane Katrina. Profits, however, were $15.1 million, or 11% net margins, versus a $3.3 million loss last year. That was due to $28.1 million dollar loss on the extinguishment of $353 million in debt, as part of a financial restructuring taking place when the company went public. In a shareholder-friendly move, the company is paying out a substantial dividend $0.40 a share. When annualized, that's equivalent to a mouth-watering 7% yield at current prices.

Aside from sheer ice-making abilities, Reddy Ice obviously knows how to keep customers satisfied: 19 of its top 20 customers have been with the company for more than a decade. In a highly fragmented industry, with many competitors earning less than $1 million in annual sales, Reddy stands out with an estimated 19% market share. By virtue of being sole supplier to many of its customers, it is perfectly positioned to share in its customers' growth. In Safeway's (NYSE: SWY  ) case, for example, the grocery merchant simply chose to outsource its ice manufacturing entirely to Reddy.

The real opportunity for this ice baron may not be in growth, though, or even acquisitions, but potentially in margins. As a result of the numerous acquisitions it made in the late 1990s, the company ended up with about 136 manufacturing and distribution facilities. Since 2001, the company has closed down 25 facilities and optimized capacity investments; as a result, it's doubled operating margins from 6.8% in 2001 to almost 15% at the end of 2005. Management still sees room for further improvement. Keep in mind, though, that year-to-date margins of 18.6% reflect a seasonally strong third quarter; they will drop with the expected loss for the fourth quarter. However, that shouldn't cool off the hot investment potential for this summer-lovin' company.

Wal-Mart is aMotley Fool Inside Valuerecommendation. To see why,click here to take a free 30-day trial.

Fool contributorStephen Ellis does not own shares in any companies mentioned. He is ranked 97 out of more than 12,000 players inCAPS. The Motley Fool has an ironcladdisclosure policy.

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