Due to the current downturn in housing industry most of the companies associated with it have been badly affected and their stocks have plunged. Investors have turned so bearish on building materials sector that some good companies have been trading well below their intrinsic value. One such company is Simpson Manufacturing, Inc (NYSE: SSD)
INTRODUCTION:
SSD is in the business of manufacturing Stainless Steel Fasteners, Heating Furnace vents and continuous shear walls for commercial and residential buildings. Majority of their sales are generated from USA, Canada and Europe. In fact their international sales have been growing at a faster pace and now constitute almost 20% of their revenue. More details about their products can be obtained from their website http://www.simpsonmfg.com/
VALUATION:
When I ran the DCF analysis on Simpson Manufacturing for a 10 year period (Assuming FCF = $78 million for year # 1, growth in FCF = 17%, discount rate = 15%, net shareholders equity excluding goodwill = $650 million, number of shares = 48 million) I got the intrinsic value close to $45/- per share. Now I am definitely not Warren Buffet who can accurately judge the intrinsic value of a company. However at today's current price of approx $29/- per share my Margin of Safety (MOS) is approx 35%. That means I can be off 35% in my calculations and still do fine. Please note that I am not assuming any dillutive effect due to increase in share count over the 10 year period and I am also assuming that at the end of 10 years the business can be sold for 10 times FCF. I have pulled all my number from Q2, 2007 quarterly report & http://www.morningstar.com/
MOAT:
What is the moat around Simpson's business? I don't really understand that at this moment and hence currently I am doing more research to learn about this? This is one of the reason I have not bought SSD yet.
FINANCIAL STATISTICS:
1) According to http://www.morningstar.com/ SSD's average Return on Equity (ROE) from 1997 to 2006 is 18.43% while average Return on Assets (ROA) over the same period is 15.83 %. ...................Pretty strong performance.............However current ROE and ROA have been around 13 % and 11% respectively.
2) Return on Invested Capital (ROIC) have been consistently above the cost of capital. In recent quarters when the market has been really bad for building materials sector; Simpson's ROIC has been around approx 19%.............I would say that's a Darn Good Performance........
3) Operating margins and EBT margins have averaged around 17.91% and 18.25% respectively for the time period from 1996 to 2006. Since SSD has never worked with a net debt situation from 1996 to 2006 they have always earned interest income as compared to paying interest. As a result the EBT margins are higher than operating margins.
4) Shareholder equity has grown at a CAGR of approx 19.75% excluding intangibles from 1996 to 2006.............
5) Current dividend yield of approx 1.4%
RISKS :
1) SSD's profitability is very much dependent on the cost of stainless steel. There has been a tremendous boom in steel industry which has been hurting SSD's margins. If the prices of this commodity continue their upward trend SSD's profitability may suffer.
2) A severe downturn in commercial and residential housing industry in USA for a prolonged period of time will deteriorate profitability and affect margins severely.
3) Slowdown in international markets for residential and commercial construction will affect SSD negatively.
4) Business risks are not adequately diversified across industry and geography.
5) Competition from low cost countries like China and India in fastening and building material markets will put pressure on SSD's financials in a deteriorating market.
I cannot think of any other risks at this moment. If any of you come across other risks associated with SSD or the moat around its business please let me know. I am very interested in learning about them . You can leave your comment at the blog itself or drop me an email at secmoney@gmail.com
As I have always said in the past...........Do your own homework and buy Simpson stock only if you are comfortable........otherwise just avoid it.........There will be lot more opportunities in future.
Regards,
Bargain Hunter
FULL DISCLOSURE:- I do not own Simpson Manufacturing's share at this point of time but I may buy that at some future date.
DISCLAIMER:- Investment in equity and equity related instruments is extremely risky and there is every possibility you will loose all the money that you invest. Please consult your financial advisor before making any investment decisions.