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North American Galvanizing Analysis

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By TMFKitKat
December 7, 2009

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North American Galvanizing [NGA] has a market cap of $79 million, 16.5 million shares outstanding, 19.5% is held by insiders, PE is 7.5, and its now 42% up from the 52-week low.

NGA has had a couple of big moves in price per share that took it out of penny stock territory

In 2006 and 2007 revenue and earnings grew impressively

Year-over-year growth

[See Post for Tables]

2005

Sales were helped in 2005 by an acquisition. There have not been any others in the ensuing years. The acquisition was in February 2005 so sales in 2006 except for Q1 were lapping the acquisition

In 2005 increased 34% over the prior year due primarily to contribution from the Canton, Ohio galvanizing facility that was purchased February 28, 2005. Same plant revenues improved 14% over 2004

A general increase in demand due to increased commercial spending and higher construction activity were responsible for the organic growth

2006

2006 was one of the watershed years taking NGA firmly away from penny stock territory. Sales increased 55% due to a higher average sales price and a 10% increase in volume. Sales prices increased in response to increases in zinc costs. The average selling prices for galvanizing and related coating services increased 41%

The London Metals Exchange (LME) market price for zinc in 2006 averaged $1.49 per pound, compared to $.63 per pound in 2005 -- a 137% increase.

This is a trend you will see repeated-as zinc goes up, revenue and even earnings increase.

2007

2007 was another incredible year for the company. Sales increased 19.4% due to increased sales prices in response to increases in zinc costs. The average selling price for 2007 was 24.2%

Although the price of zinc and galvanizing declined in the second half of 2007, NGA's ability to capitalize on high quality, timely customer service and the generally high demand for galvanizing services provided for an increase in sales prices.

Sales volumes were actually 3.9% lower. Lower volumes were partially the result of a scheduled shutdown of the Canton, Ohio plant to replace the kettle and furnace for one month.

2008

Even though volume was up, with a decrease in zinc, revenue was down

Sales volumes increased 7% due to an overall increase in demand from existing customers and incremental project work. The average selling price for 2008 was 9% lower as a result of decreased zinc costs. The decrease in 2008 revenues was due to a combination of an increase in volume and a lower average sales price compared to 2007. Sales prices have decreased related to decreases in zinc costs.

There was a $7.1 million decrease in COGs due to a decrease in zinc costs of 39.3%.

2009

Third quarter 2009 volumes were 2.7% higher than Q3 2008. First nine months' 2009 volumes were 5.6% higher

Q3 2008 volume was negatively impacted by the nine-day shutdown in the Houston, Texas plant due to Hurricane Ike.

Sales for the three-months and nine-months decreased 8.2% and 8.9%, respectively. The decreases were due primarily to a lower average sales price. Because of the economic downturn and anticipated drop in overall demand for hot-dip galvanizing, NGA focused on gaining larger volume work resulting in lower priced project work. For 2009, average selling prices for galvanizing and related coating services were 10.7% lower than the prior year third quarter and 13.7% lower than the first nine months of 2008.

COGs decreased $1.0 million in Q3 due to lower zinc prices and utility costs. For nine months COGs decreased $3.4 million

Galvanizing

NGA does hot dip galvanizing of metal products and components fabricated and owned by its customers. All of NGA's revenue is generated from the value-added galvanizing and coating of customer-owned products.

Iron and steel products are in molten zinc; a bonding that produces an alloyed metal surface that provides an effective barrier against oxidation and corrosion from exposure to the elements, for up to 50 years.

Additional coating services include sandblasting, quenching, metalizing (flame sprayed), centrifuge spinner galvanizing, Corrocote Classic II painting and INFRASHIELDsm Coating.

Plants

I would consider that more plants widely distributed geographically would improve the customer base. NGA has averaged right around 1700 customers for the last few years. That increased to 1800 in 2009

NGA has ten galvanizing plants in seven states. These provide galvanizing to manufacturers in a broad range of basic industries in the mid and south-central United States. Plants are located in Tulsa, Oklahoma; Kansas City, Missouri; St. Louis, Missouri; Nashville, Tennessee; Louisville, Kentucky; Denver, Colorado; Canton, Ohio; Hurst, Texas and Houston, Texas.

They are in the process of constructing a new hot dip galvanizing plant in Benwood, West Virginia. The new operation, operational in late April 2009, utilizes a 30 foot kettle and is the eleventh hot dip galvanizing plant.

The company does not open a large number of new plants.

In the fourth quarter of 2002, they opened a plant in St. Louis, Missouri with a 51-foot kettle, providing the largest galvanizing capacity in the St. Louis region.


In 2001, they completed a new galvanizing plant in Houston, Texas. This facility included a 62-foot galvanizing kettle with capabilities to process extra large poles for the wireless communication and electric transmission markets.

Raw Material

Zinc, the primary raw material and largest cost component in the galvanizing process, is the fourth most widely used metal in the world. Its resistance to non-acidic atmospheric corrosion means that zinc is instrumental in prolonging the life of buildings, vehicles, ships and steel goods and structures of every kind. Accordingly, galvanizing accounts for more than half of all present day applications of zinc. During 2007 and 2008, there were no major supply disruptions in the zinc market.

Over the past several years, the market price of zinc has been volatile. During 2006, the spot price of zinc was as high as $2.10 per pound and as low as $0.87 per pound.

During 2007, the LME spot price of zinc was as high as $1.93 per pound and as low as $1.00 per pound.

During 2008, the LME spot price of zinc was as high as $1.28 per pound and as low as $0.47 per pound, ending the year at $0.51.

Higher prices for zinc allow for increased pricing and better earnings. Because of the volatility of zinc, there is some uncertainty in how much revenue can grow in any particular quarter even with increased volume.

Conclusions

This is a well-run profitable small business. I would expect even without increasing plants or customers, revenues can grow just from the price appreciation of zinc and increased volume during any economic recovery. In spite of the severity of the downturn combines with a staggering fall in zinc, they have not seen business fall significantly. The price per share has recovered 43% off the 52-week low.

The growth may cap what this business will eventually return to shareholders. NGA is not in a hurry to be the biggest galvanizing business in the US. This is a fine business strategy and is working for them. You could not ask for a better run small business. The new plant opened in 2009 may provide some revenue growth in 2010. The best way to make money on them is to catch them at relatively low historic prices and then count on them to make the expected recovery. The current price at $4.80 might allow you to make 20-30% if they grow revenue as we might expect over the next two or three years providing the recession ends and the US economy shifts gears out of low to overdrive.

The margins have held steady, return ratios are high, the PE is low and debt is negligible making this a good candidate for Rich's screen.

[See Post for Tables]