Even with a diverse group of companies in the Barrel portfolio, a reader pointed out recently that this eclectic mix lacks one of the small industrial supply firms that make the economy tick.
While the observation is correct, I wondered whether including an industrial company in the portfolio made sense with the economy possibly on the brink of a double-dip recession.
Though concerns remain over the timing of a recovery, things are bound to get better, and when they do, exposure to a solid industrial supply company makes good sense.
In the meantime, to provide some protection against the teetering industrial economy, I went looking for a relatively inexpensive company with a good balance sheet, diverse business lines and, preferably, a name where I could get paid to wait.
to the Barrel portfolio.
Ameron makes protective coatings that are used in the oil and gas business, marine operations and other industrial applications. Ameron develops polymer substances that adhere to pipes, and the company makes other materials that protect products from the elements and extend the life of industrial tubing.
In addition, the company is a leader in concrete and steel pipe used for water and sewage projects in California and other western states.
The company's stock has suffered this summer for several reasons. Insiders began bailing in April, at prices around $70, in a number of options-related transactions.
Investors have also grown nervous over Ameron's involvement in a Middle Eastern joint venture -- the company owns 30% of Ameron Saudi Arabia -- where the company provides products in the oil patch and for other industries.
But the real concern for Ameron's shareholders is the timing of the economic recovery and, more importantly, a resurgence in industrial demand, the heart and soul of the company's business.
In the August quarter alone, sales for its pipe business declined 22% as demand in both domestic and European markets continued to plunge. Sales in Ameron's coatings business dropped 4%, and revenue in the water group sank 7% in the same period.
Shareholders responded by selling their stock.
Protective Portfolio Coatings
Getting excited about a company with quarterly comparisons as challenged as Ameron's is tough, but the summer-long descent makes the stock intriguing.
Of course uncertainties about military action against Iraq add a bit of risk to the equation, but as oil and gas prices slowly creep higher, demand for Ameron's oilfield products should begin to recover as gas and oil production slowly increases over the next year.
Additionally, a concrete project in Saudi Arabia combined with a significant infrastructure project on the San Francisco Bay Bridge should boost results in the coming quarters. In fact, even though revenue in Ameron's water transmission group declined in the third quarter, margins increased by nearly 8%, typically a sign of recovery.
Although it may be difficult to predict the timing of an economic recovery and the resulting improvement in demand for Ameron's industrial product lines, current prices provide good risk-reward on the basis of the fundamentals.
Ameron is on track to earn $7 a share in 2002, putting the current multiple at just over seven times this year's earnings. Moreover, you get paid to wait as Ameron's $1.28 dividend provides a healthy 2.6% yield.
With debt at only 19% of capital and the dividend representing only 10% of cash flow, Ameron not only has plenty of dividend cushion but also the capacity to weather additional economic uncertainty.
Ameron looks like a solid small-cap industrial holding. And, fundamentally, the company should post solid earnings gains as the economy recovers. With a solid balance sheet and a nice dividend, the stock should provide good returns over the next three to five years.
However, the company does have some issues beyond the economy. For starters, Ameron has been named in asbestos action. While this probably won't be a significant liability for Ameron,
asbestos has been a curse for a plethora of companies and must be watched carefully.
Also, judging from insider transactions, executive sales suggest the stock's upside is likely capped at around $70 a share. Still, that's a nice 40% gain from current levels, something that is achievable over the next three to five years.
Finally, with average daily volume of just over 10,000 shares, liquidity is also a consideration.
To sum up, Ameron's diverse industrial offerings, solid balance sheet and dividend make it an intriguing company at current prices. While the economy and asbestos deserve careful attention if you own the stock, it's a name worth considering. I give it two-and-a-half barrels and add it to the Bottom of the Barrel income portfolio.
I'm on the road this week, but the complete Barrel history will return next week, and I'll begin taking an early look at the 2003 prospects for the Barrel companies.
Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to