From the value vault:
Okay, today's not the day to use
as the example of a company you want to own. Late Thursday the company reported that its second-quarter earnings would fall below analyst estimates. However, with blades acting like an annuity, the Gillette model is a model that can be a winner. In fact, yesterday's news notwithstanding, Gillette said its blade biz was blazing.
Which brings us to today's sermon: Next time Wall Street decides it wants to invest in industrials, consider looking for the Gillettes of the industrial world.
Pzena Investment Management
in New York counts two in its portfolio:
, two industrial has-beens that Pzena portfolio manager Alan Fournier believes are once again primed to become industrial hits.
Kennametal makes special tungsten carbide bits used in industrial drills and saws. "Anytime you cut metal, you're using their product," Fournier says. The company has the leading share of its market but saw its business collapse along with the global recession. "In particular," he says, "they were hurt by the slump in oil, because when you drill a hole in the ground they make the device that cuts the rock."
Kennametal subsequently brought in new management. Now, with industrial production starting to rise around the world, "there's a high likelihood this company once again will have a significant earnings multiple."
Ucar, meanwhile, makes graphite electrodes used by minimills as a key ingredient in the steel-making process. The company was doing fine until it and its two leading competitors -- one from Germany and one from Japan -- pleaded guilty to price fixing. (Don't know about you, but I just hate it when that happens!) As with Kennametal, new management arrived and immediately started cutting costs. Pzena's bet is that as industrial production rises, so will demand for disposable graphite electrodes.
As for that Gillette comparison: It's one thing to buy industrial Gillettes at 10-times earnings; it's another to buy a consumer Gillette at 36-times, which is where it was before the shave it's likely to take today.
Graveyard gossip, cont'd:
Previous items here have
explained why some short-sellers believe the stock of
is headed for its own funeral. One high-yield bond analyst, who is not short Stewart and who must remain anonymous, agrees the company is headed for trouble, but for a slightly different reason than the quality of earnings/balance sheet issues raised by the shorts. His concern: the quality of earnings before interest, taxes, depreciation and amortization.
"Everyone seems to assume EBITDA is cash flow, but as you certainly know, it's not because revenue does not always equal an actual cash inflow. That is especially true in the case of a company like Stewart, which books tons of revenue from pre-need cemetery sales where it won't actually receive all the money for a number of years."
This analyst believes Stewart is beginning to resemble rival
, when it was on its way to bankruptcy. "It is piling on the debt every year based on an EBITDA number that is far different from its actual cash flow number," he says. "Check out its receivables over one year due. They went from $200 million to $257 million in the last fiscal year. Add in its current receivables, and the company has $428 million in receivables on $648 million in sales. And the growth of receivables means that while EBITDA has grown to $215 million in fiscal year '98, operating cash flow has remained near zero.
"Given the increasing amount of debt the company is piling on," he adds, "Stewart could be putting itself into a tight spot where it will need new equity at the same time its equity value is collapsing as people realize its cash flow is negligible. Can the same death spiral scenario happen in the deathcare industry again? I think it can."
Why is that not the case? I'd love to hear from Stewart execs with an answer.
The point of our
last item here on
, which both distribute drugs to nursing homes, was that NCS' balance sheet was inferior to Omnicare's. Specifically, NCS' receivable days outstanding were outta sight (much higher than Omnicare's), and it had negative cash from operations, vs. positive cash flow for Omnicare.
The point was that if Omnicare is the best public operator in a very bad industry, what can that possibly imply for NCS?
Well ... yesterday Omnicare disclosed that its earnings would miss analyst estimates, and at least one analyst, Ray Lewis, from
, downgraded the stocks of both companies to a hold. In a report to clients, he wrote that their industry "is being brutalized."
"And he didn't even mention the quality-of-receivables issue," one cynic squawked.
Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at
email@example.com. Greenberg also writes a monthly column for Fortune.