Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: flesh on August 31, 2017, 02:37:07 PM

Title: NC - Nacco
Post by: flesh on August 31, 2017, 02:37:07 PM
I thought that a thread existed for NC, I couldn't find it, feel free to move this there. Apparently my search skills are lacking.

Start here: https://valueinvestorsclub.com/idea/Nacco_Industries/137450

Of note, EV in write up vs now, debt down, cash up.

FWIW, one, the guy who wrote this was spot on in his earnings estimates, two, he recently told me that "it's worth low 80's maximum", as recently as the spin announcement. Maybe he's right, I see more. Probably because I overweight reliable, relatively high, current/knowable owners earnings yields more than most.

Disclosure, I invested in this originally 1/2016 at 45, sold throughout the 70's. Recently took at 10% position at 66 after reconsidering the business and it's prospects. The price is all over the place and it wouldn't surprise me if there's opportunities to get in where I did......bottom ticking on certain days can work. Post earnings, due to volume spikes, there's often opportunities to put small amounts to work.

I'll try to keep this short and not be redundant vs VIC write up.

Recently NC announced the spin off of HBB, kitchenware (future ticker) from NC (north american coal), slated for q3 17'.

What you get,

Cy 17' fcf yield 8.5%. CY 17' estimated ebitda 92m,  25m capex (higher than previous two years), 10m corporate/sg&a estimate (higher than previous two years), 4.3m interest, taxed at 20%. 42m ish fcf.

Company can be made at TTM earnings, ex-centennial, ex-kitchen collection, around 8.65/share, selling at 8.3x ttm adjusted pe. NTM ex centennial/kitchen collection earnings should come in around 10/share, selling at 7x NTM earnings.

Earnings at nacco should grow at 4% (contract escalations) for a long time absent new coal mines, possibility for some new mines slowly over time such as Bisti (started delivering coal q1 17'). Also, Lime rock showing positive signs last two years.

Earnings at HBB absent M&A post spin should grow 5-10% a year, possible inflection point 2h 17'..... margins expanded rapidly yoy in 16 and again yoy 1h 17, don't know why, mgmt says increased distribution channels from weston acquisition/higher margin products/internet penetration.

Kitchen Collection:

Operating cash flow positive in 16', NI slight loss, I expect NI slightly positive in cy 17'. More stores are being closed than opened, possibility to close up to 15% of stores annually as leases expire , over 200 stores, I can't see why at least half of them wouldn't be profitable. IR says only 4.2m of HBB's sales came from Kitchen collection.
It seems clear that by selling predominantly competitor's kitchen ware in over 200 locations nationwide that would provide valuable direct data for HBB in terms of product/pricing trends. HBB can see clearly what's selling and what's not and adopt best practices/copy/manufacture new products. Will be part of HBB post spin.

Hamilton beach brands:

NTM estimated operating cash flow 46.6m/NI 29.4m. Recent comp sold to Goldman at 17x ebit. From q3 16' earnings call transcript:

"Michael Fisherman

Thank you. Good morning, Al. My question is very similar to Jacob's, during the quarter Goldman Sachs took company [indiscernible] for 1.4 times revenue or 17 times EBIT. If we apply those multiples to Hamilton Beach trailing 12 month revenue and earnings or EBIT. You get a value about $630 million to $820 million which is greater than the whole company of NACCO. My question is why don't you explore strategic alternatives for this division"

Happy Call is the Korean kitchenware company mentioned ^^^^^ see:
https://www.amazon.com/Happycall-Anodized-Nonstick-10-piece-Dishwasher/dp/B00OTYV33Q/ref=sr_1_1?ie=UTF8&qid=1504214267&sr=8-1-spons&keywords=happycall+pot&psc=1

Due to founding shareholders overwhelming voting majority, don't expect HBB to be acquired until two years post spin due to tax consequences. Post spin M&A likely.

HBB spin preliminary prospectus:

https://s22.q4cdn.com/351071137/files/doc_downloads/important_docs/Final-Preliminary-Prospectus-for-website.pdf

Of note, pg 19, 15-17', rev down slightly, margins up significantly.

Long time ceo Al Frankin is gone:

http://nacco.com/news-room/news-releases/news-releases-details/2017/NACCO-Industries-Inc-Announces-Plans-For-CEO-Transition/default.aspx

Nacco/coal/lime rock:

61.8m estimated unconsolidated mines Pre-tax earnings cy 17'. Liberty mine is dead, it didn't have any tons sold, doesn't effect any current numbers. Almost all contracts expire in greater than 10 years. Camino set to expire 2018, IR couldn't confirm which qtr, only been open 3 years, seems like a lot of work for only three years. IR says they will talk about Camino during EC soon. Using my metric of unconsolidated mines earnings per million tons sold to estimate a camino loss I get, 1h 17' camino tons sold = 1.2m annualized = 2.4m x 1.75m per million tons sold = pre tax earnings = 4.2m. Therefore, 2018 uncon earnings, minus camino, should be similar to 17' due to a partial loss of camino and a small gain from contract escalations. In 19' absent camino, I'd expect to see some 2-3 million reduction in uncon pre tax earnings. Possibly compensated by greater lime rock, new mines, or contract escalations.

-Freedom mine (expires 2022) “Although the term of the existing coal sales agreement terminates in 2022, the term may be extended for three additional periods of five years, or until 2037, at the option of Coteau.” The renewal appears to be at the discretion of nacco.

Pension:

As of 14' defined benefit frozen, replaced with defined contribution, minimal risk here absent market catastrophe...

From 16' 10-k

"“Changes to the estimate of any of these factors could result in a material change to the Company's pension obligation causing a related increase or decrease in reported net operating results in the period of change in the estimate. Because the 2016 assumptions are used to calculate 2017 pension expense amounts, a one percentage-point change in the expected long-term rate of return on plan assets would result in a change in pension expense for 2017 of approximately $0.7 million for the plans. A one percentage-point change in the discount rate would result in a change in pension expense for 2017 by approximately $0.1 million . A one percentage-point increase in the discount rate would have lowered the plans’ projected benefit obligation as of the end of 2016 by approximately $6.3 million ; while a one percentage-point decrease in the discount rate would have raised the plans’ projected benefit obligation as of the end of 2016 by approximately $7.4 million .”

I'll stop boring you now.

What's it worth? I don't know. What's the correct multiple post spin, I don't know.

How long before centennial is actually ex-centennial? I don't know, I'm using three years for my irr calcs, tell me why I'm wrong here. 

Long term, cost plus, coal contracts with escalators should sell at a higher multiple than a company tied to coal prices. If coal companies sell for 6-7x, how about 8-9x? Seems reasonable, buying back stock with excess cash would yield a nice return.

Hbb, two years from now, could be acquired at a high multiple. Let's say it's worth 13x earnings. Using the write ups comps plus Happy Joy, seems conservative.

Centennial is gone in three years.

Current Mkt cap = 500m, I won't use ev as it's conservatively financed.
Kitchen collection = 0
Hbb, 13x 30m NI = 390
NC, 8.5 x 46m NI = 391
40m cash piles up per year next three years = 120m

=390 + 391 +120m = 900m three years from now= 21% cagr plus 1.5% dividend = 22.5%.

Naturally none of the above will happen as we can expect significant changes to both
co's post spin.

If there's an arb play here, I don't have any clue.

Cheers.










Title: Re: NC - Nacco
Post by: flesh on September 30, 2017, 12:22:03 PM
Today I was distributed my shares in HBB. I'm trying to understand what the respective market caps are on my different shares. They were distributed on a 1 for 1 basis. Apparently I'm not familiar with how this works, I know at what value I would buy/sell more of either nc or hbb but I'm not sure how to get there.

I'm showing nc shares at 85.45, HBB shares at 33.10 and hbbb.rstd shares at 26.00.

Nc had 6.8 m shares outstanding so HBB should have the same. 6.8m x 33.10 =225m, which is much to low for HBB. I'm not sure what differentiates hbb from hbbb.rstd however if I add 33 + 26 to get 59 x 6.8m = 400m which would be slightly over 13x my NTM NI estimate and clearly much closer to fair value than 225m.

Also, my account is showing a much smaller total balance (it was a large position), I'm guessing the value of the spun off shares aren't reflecting, not sure. If I add the
total position value of HBB and HBBB.RSTD it represents a larger number than half of the value of my shares of NC yesterday, not sure if this means it's been bid up since the split and I don't know what NC absent HBB is being valued at.

Anyways, just trying to clarify so I can understand this process and perhaps take advantage of any mispricings between the two as I have my own notion of where I would add to each and the dynamics may lend themselves to some temporary opportunities.

Thanks.




Title: Re: NC - Nacco
Post by: flesh on October 02, 2017, 01:09:09 PM
Evidently the less favored remainco dynamics played out in early trading today. At 24/share remain co was selling for mkt cap of 163m with 60m NTM Ebitda.
Title: Re: NC - Nacco
Post by: writser on October 02, 2017, 03:24:01 PM
In case you hadn't figured it out:

Quote
The Hamilton Beach Holding Class B Common will not be listed on the NYSE or any other stock exchange and is subject to substantial restrictions on transfer. Each share of Hamilton Beach Holding Class A Common is entitled to one vote per share on matters submitted to a vote of the Hamilton Beach Holding common stockholders. Each share of Hamilton Beach Holding Class B Common is entitled to ten votes per share on matters submitted to a vote of the Hamilton Beach Holding common stockholders, is subject to transfer restrictions and is convertible into one share of Hamilton Beach Holding Class A Common at any time without cost at the option of the holder.
Title: Re: NC - Nacco
Post by: grym02 on October 02, 2017, 04:37:58 PM
Evidently the less favored remainco dynamics played out in early trading today. At 24/share remain co was selling for mkt cap of 163m with 60m pre tax earnings.

Can you walk through your calculation 60m of pre-tax earnings for NC? And how much debt and other liabilities you think make up EV?
Title: Re: NC - Nacco
Post by: writser on October 03, 2017, 01:22:51 AM
Some good discussion here about valuation here (http://clarkstreetvalue.blogspot.nl/2017/09/nacco-industries-hamilton-beach-spinoff.html) . Congrats to those who bought (why didn't I ..?) . As for liabilities, you can substract the pro-forma numbers in the HBB prospectus from the latest 10Q. Also take a look at the presentation (https://www.sec.gov/Archives/edgar/data/789933/000119312517286760/0001193125-17-286760-index.htm) from yesterday. As far as I can see Nacco has a net cash position with 69m in debt, 55m in cash and a 35m dividend incoming from HBB but that's just at a quick glance.
Title: Re: NC - Nacco
Post by: flesh on October 03, 2017, 10:03:23 PM
Evidently the less favored remainco dynamics played out in early trading today. At 24/share remain co was selling for mkt cap of 163m with 60m pre tax earnings.

Can you walk through your calculation 60m of pre-tax earnings for NC? And how much debt and other liabilities you think make up EV?

Sorry, I meant 60m NTM Ebitda. My bad. This is ex centennial and with the added benefit of bisti as well as some moderate contract escalations.
Title: Re: NC - Nacco
Post by: flesh on September 13, 2018, 10:00:42 AM
I was hesitant to post this because I wanted to see buybacks here as it's easy to move the price. Some buybacks were done last quarter at around 33/share, a mere 100k worth. I believe there's 25m auth outstanding.

I'm up to about 15% of net worth in nc at 30.xx/share. Haven't sold any in my taxable account since last summer. Had my final fill today at 32.60.

-Capex was higher this year than the previous 4 years. Based on that, I expect it to go down next year and fcf to be at or greater than eps.

-At such a low multiple, I like the robustness here, losing one contract doesn't change margins. Afaik, profits would change very little in a economic down turn. Look at debt/cash levels yoy and qoq.

-absent multiple expansion, I believe we can do 15%/year for the next few years if we simply get credit for cash pile up.

-I believe there's a few things that may cause multiple expansion. 1. A coal contract win (there have been many last five years). 2. Aggregates grows as a % of total business. Aggregates has grown from around 7-15% of profits last few years, I'm counting the two new contract wins going live next two quarters in the 15% and assuming they are of similar size to previous wins. Ceo claims this is a good fit for their skill set and that the aggregates cost plus business could be huge for them, large TAM. I don't know when this inflects but certainly if we move from 15% of profits to 22%(extrapolating) in the next few years it should be noticed. #1 or #2 should dispel the melting ice cube narrative. 3. Significant buybacks/dividend increases as cash piles up with no where to go, debts almost gone already, they'll have to do something. 4. Not sure why but on gurufocus and yahoo finance, the EV is incorrect as of last quarter's print. 5. In about a year, the founding families could do m & a/take private wo excess tax consequences if I'm understanding it correctly. 6. Eventually, centennial and it's costs should disappear, whether it's sold or otherwise disposed of.



Title: Re: NC - Nacco
Post by: Spos on September 13, 2018, 12:45:55 PM
-At such a low multiple, I like the robustness here, losing one contract doesn't change margins. Afaik, profits would change very little in a economic down turn. Look at debt/cash levels yoy and qoq.

I own this as well, but I think the risk of losing coal contract is real and while margins would not change much, profits would go down significantly, pretty much in proportion to the production lost.  The other risk is decreased production at the associated power plants as renewables grow (wind is big in North Dakota).

-I believe there's a few things that may cause multiple expansion. 1. A coal contract win (there have been many last five years). 2. Aggregates grows as a % of total business. Aggregates has grown from around 7-15% of profits last few years, I'm counting the two new contract wins going live next two quarters in the 15% and assuming they are of similar size to previous wins. Ceo claims this is a good fit for their skill set and that the aggregates cost plus business could be huge for them, large TAM. I don't know when this inflects but certainly if we move from 15% of profits to 22%(extrapolating) in the next few years it should be noticed.


How do you get to 15% of profit for limerock?  My understanding is that the figure is lower as the scope of work they do for the limerock querries is much narrower so the fees received should be significantly lower (on a per ton basis).  I haven't seen them quantify the differences between coal and limerock profitability.  Have you seen anything?

Title: Re: NC - Nacco
Post by: Nell-e on September 13, 2018, 05:08:11 PM
Interesting article from earlier this year:

https://bismarcktribune.com/business/local/power-cooperative-doubling-down-on-renewables/article_2c3f2f6e-b357-558b-97dd-0325a72a6102.html
Title: Re: NC - Nacco
Post by: flesh on September 14, 2018, 10:07:21 AM
https://www.scientificamerican.com/article/where-will-the-us-get-its-electricity-in-future/

https://www.eia.gov/tools/faqs/faq.php?id=427&t=3

No doubt over time some coal mines will deliver fewer tons, some closed down, is this offset by new contract wins in coal? I don't know. If the current mines only decline on average by 1/3 by 2034, a few contract wins happen between now and then, and aggregates/minerals at NAM continue anywhere near the current pace, this will work out quite well.

On another note, bisti delivered 3.7m tons in 2017. Delivered 1.2 m tons first half 18' and is expected to deliver a similar number for all of 18' vs 17'. Therefore, bisti should deliver around 2.5m tons 2h 18'. Also, per mgmt, should ramp to 5-6 m tons/year in 2019.

Coal/diesel/salaries/inflation are all accelerating of late and affect the contract escalations. This should cause slight margin expansion.

FCF/ev or eps/ev is simply too cheap. Hard to permanently lose capital here and many upside options.



Title: Re: NC - Nacco
Post by: Spos on September 17, 2018, 10:43:08 AM
I agree that this is cheap and like the risk/reward here, I probably just think that the downside is bigger and the upside smaller.  In lignite, losing contracts is painful and I am just not sure how much scope there is for new contract wins in the space.  Lignite production is 65M-70M tons and NC is doing 37M of that, so how many more contracts can they realistically go get.  I think growth has to come from limestone (and any other materials they can expand into). It's just going to be slow as these operations are more limited and provide smaller fees.
Title: Re: NC - Nacco
Post by: flesh on September 18, 2018, 04:40:26 PM
Fair enough spos. Absent aggressive capital return, I see this doing well, not fantastic. That said, they are going to have a ton of cash relative to ev burning holes. The debt's almost gone and irrelevant at these levels. Assuming next year is a normal capex year vs this year's ultra high level ... what to do with excess cash should be top of mind. They claim in their docs to have the shareholder returns for taxable investors in mind.

If NC mgmt is paying attn it's painfully obvious they should be loading up on buybacks at these prices.

Absent any extraneous costs from centennial or otherwise not compensated by reclamation activities at Liberty, second half earnings should be indicative of what 19' will bring. We have MLMC and bisti ramping to normal. We have new limestone contracts increasing in pace. Capital allocation decisions becoming acute, virtually no debt.

In case anyone missed it from last q's print:

"At the consolidated operations, Mississippi Lignite Mining Company's pre-tax income in the second half of 2018 is expected to increase substantially over the second half of 2017 and the first half of 2018, primarily as a result of a reduction in the cost per ton of coal delivered during the second half of 2018.  In general, cost per ton delivered is lowest when the power plant requires a consistently high level of coal deliveries, primarily because costs are spread over more tons.  Historically, periods of reduced or fluctuating deliveries, such as during planned or unplanned power plant outages or periods of fluctuating demand for electricity generated by the plant, have adversely affected Mississippi Lignite Mining Company's tons delivered, resulting in an increase in cost per ton delivered and reduced profitability.  Customer demand in the second half of 2018 is expected to return to higher levels because fewer plant outage days are expected compared with the prior year.  Improved income in the second half of the year, primarily in the third quarter, is expected to offset the lower income in the first half of 2018 resulting in full-year 2018 income at Mississippi Lignite Mining Company that is comparable to 2017.  If customer demand does not improve as expected at Mississippi Lignite Mining Company, it could unfavorably affect North American Coal's 2018 earnings significantly."
Title: Re: NC - Nacco
Post by: Foreign Tuffett on September 18, 2018, 06:05:06 PM
I agree that this is cheap and like the risk/reward here, I probably just think that the downside is bigger and the upside smaller. In lignite, losing contracts is painful and I am just not sure how much scope there is for new contract wins in the space.  Lignite production is 65M-70M tons and NC is doing 37M of that, so how many more contracts can they realistically go get.  I think growth has to come from limestone (and any other materials they can expand into). It's just going to be slow as these operations are more limited and provide smaller fees.

IMO these are really smart thoughts. Thanks.

Anything is a buy at the right price, but a US lignite coal producer needs to be very cheap. I think there's a real risk of $0 terminal value within a decade.
Title: Re: NC - Nacco
Post by: flesh on September 19, 2018, 09:51:46 AM
I agree that this is cheap and like the risk/reward here, I probably just think that the downside is bigger and the upside smaller. In lignite, losing contracts is painful and I am just not sure how much scope there is for new contract wins in the space.  Lignite production is 65M-70M tons and NC is doing 37M of that, so how many more contracts can they realistically go get.  I think growth has to come from limestone (and any other materials they can expand into). It's just going to be slow as these operations are more limited and provide smaller fees.

IMO these are really smart thoughts. Thanks.

Anything is a buy at the right price, but a US lignite coal producer needs to be very cheap. I think there's a real risk of $0 terminal value within a decade.

Excluding centennial,NC is trading at 6x ntm eps ish and less than that on a eps/ev fcf/ev for cy 19'.

Curious why you believe lignite (or all?) coal may be a zero in ten years? We've had around a 35% drop in the last ten. In the attached the prediction suggests 20% drop from 16-50', which seems too small. I've seen other predictions in the -20 to -50% range next twenty years.

Personally, I don't see how we can get to a zero on coal within ten years without a federal mandate and I don't see that happening in ten years.

Two other questions.

1. How long will mine mouth lignite coal (all of nacco's current production) be around vs coal in general, the utility will be shut down concurrently? I certainly see reduced power needs on the assets over ten years and some % shut down completely. If the power needs for the area have a high availability of renewables for example.

2. Is coal a national security issue at some point? If coal use was reduced by 2/3 from here... would we need those remaining facilities in good shape maintained considering none are being built? Would we expect a higher or lower % of these remaining to be mine mouth?

From attached:
"IEEFA’s long-term outlook, through 2050, is for a steady, downward decline in coal production as demand from utilities decreases. The EIA is in general agreement. Its long-term outlook has overall U.S. coal production declining to 583 million tons by 2050, a 20% drop from 2016, a projection that would mean a 50 percent decline from a 2006 peak of 1.2 billion tons. Over the long term, IEEFA also sees the U.S. coal industry becoming even smaller than these
projections suggest, because coal-fired power plants could be retired at a more rapid pace than the EIA assumes."

Title: Re: NC - Nacco
Post by: flesh on October 30, 2018, 02:38:45 PM
At 29.xx/share we may see a 4x eps and fcf /EV multiple in cy 2019. Ev should be about 143m after this print at 29.xx/share.


0/30/2018
CLEVELAND, Oct. 30, 2018 /PRNewswire/ --

Highlights:

Revenues increased to $31.4 million, up 43.3% over Q3 2017
Income from continuing operations before income tax increased to $10.7 million, up 78.9% over Q3 2017
Earnings per share from continuing operations increased to $1.33/share from $0.49/share in Q3 2017
NACCO Industries, Inc. (NYSE: NC) today announced consolidated income from continuing operations of $9.2 million, or $1.33 per diluted share, and revenues of $31.4 million for the third quarter of 2018 compared with consolidated income from continuing operations of $3.3 million, or $0.49 per diluted share, and revenues of $21.9 million for the third quarter of 2017.

As a result of NACCO's spin-off of its housewares-related business in September 2017, the attached financial statements and related year-to-date 2017 financial information in this news release have been reclassified to reflect the housewares business' operating results as discontinued operations.

For the nine months ended September 30, 2018, the Company reported consolidated income from continuing operations of $23.8 million, or $3.43 per diluted share, and revenues of $96.3 million compared with consolidated income from continuing operations of $18.8 million, or $2.74 per diluted share, and revenues of $78.3 million for the first nine months of 2017.  NACCO's effective income tax rate was 12.7% for the nine months ended September 30, 2018 compared with 19.5% for the nine months ended September 30, 2017.

NACCO ended the third quarter of 2018 with consolidated cash on hand of $83.1 million and debt of $17.5 million.  At December 31, 2017, NACCO had consolidated cash on hand of $101.6 million and debt of $58.1 million.

In February 2018, NACCO's Board of Directors authorized a stock buyback program to purchase up to $25 million of the Company's outstanding Class A common stock through December 31, 2019.  The Company repurchased approximately 10,400 shares for an aggregate purchase price of $0.3 million since inception of this program, including $0.2 million of stock purchased during the three months ended September 30, 2018.

Consolidated Fourth Quarter 2018 Outlook

In the fourth quarter of 2018, NACCO expects consolidated income from continuing operations before income tax to increase substantially compared with the fourth quarter of 2017, even though the 2017 fourth quarter results included $1.6 million of gains on sales of assets.  Excluding the gains on sales of assets, NACCO expects the 2018 fourth-quarter income before income tax to increase primarily due to a decrease in operating expenses, mainly related to lower employee-related costs, and modest improvements at the consolidated operations, excluding Centennial.  These improvements are expected to be partially offset by a decrease in royalty income and an increase in Centennial's pre-tax loss.

NACCO Industries, Inc. Outlook - 2019

In 2019, NACCO expects consolidated income before income tax to increase compared with 2018 and expects an effective income tax rate in the range of 11% to 14%.  Income before income tax is expected to increase primarily as a result of an increase in royalty income and improved results at the consolidated coal mining operations.

Cash flow before financing activities is expected to increase in 2019 compared with 2018.  Capital expenditures are expected to be approximately $19 million in 2019.



Title: Re: NC - Nacco
Post by: Spos on July 30, 2019, 11:53:53 AM
In Q1, NC redid their segments and separated out the coal, aggregates and royalty business.  The aggregates business provides an even smaller portion of earnings than I expected, with 2018 EBITDA at $3.4M vs. $50M at coal.  So this business is not going to move the needle too much.  It seems that the growth business is the royalty business.  There was a big jump in earnings in 2019Q1 EBITDA of $12M vs. $15M for all of 2018). The growth seems to be coming from their Utica lands. 

This is obviously high margin stuff so further growth can be very interesting.  I just don't have any insight into how much land and reserves they have.  The 10K doesn't have any info.  Has anyone done work on the royalty business?
Title: Re: NC - Nacco
Post by: EricSchleien on July 31, 2019, 10:04:54 AM
For those interested in this company, I recently did a podcast with Geoff Gannon on Nacco.

You can listen here: https://bit.ly/2WbAY1V

Best,
Eric