NGA

[David Randolph]

NGA had a remarkable day yesterday, but it needs to close above $8.80 to be in a confirmed bullish mode.

If I get away with NGA, and get, say, a 100% plus profit, it will be great because it was another step in my learning process.

Motley Fool said bearish things about the galvanizing services industry, saying it is a "commodity like" business, with rising and falling profit margins according to the economic cycle. I disagreed, because I heard (and believed) that type of talk before (in PCU's case) and that made me lose a 150% advance in less than 12 months. Not this time, no, no.

If a stock is growing strongly and it has a cheap valuation, it will most likely go up. Tell me, what would happen if NGA were to stay at 8 times earnings and grow 100% a year for the next three years? In 2008 it would be at 4 times earnings, in 2009 at 2 times and in 2010 one could buy the company and get his investment back in just one year, and then enjoy another 30 years or more of clean profits. This is why NGA needs to rise, it is too undervalued ...

Because to say that NGA won't keep growing like it has been growing because fat profit margins will increase supply in the sector is not to know how inefficient an economy is, at least over the short/medium term. Things move much more slowly than economists and investors think. I don't see anybody excited about the galvanizing services industry. Most people don't even know what that is. That's why NGA is still so cheap, but it won't last, in my opinion.

I'll continue holding NGA for the long term.

[David Randolph]

7.7% decline on Friday for NGA. My joy didn't last long ... anyway, it didn't fall as much as it rose on Thursday.

The long term fundamental story didn't change, I see NGA at $14 plus in 12 months time and I'll keep holding the stock.

[David Randolph]

After what AZZ said about the quarter ended in August 31st:

«Mr. Dingus continued, "Robust market demand for our galvanizing services has positively impacted our ability to maximize our operating results. While pricing is up significantly, we are most pleased that our tonnage processed continues to increase. The second quarter results reflect the expensing of higher zinc cost, yet margin remained about the 25 percent level. The recent reduction in the cost of zinc will require us to closely monitor our operations and pricing for the balance of the current fiscal year in order to maintain margin levels. The programs of providing a superior level of service and performance to our customers continue to position us for further growth and expansion of our served markets and increased market share."»

I expect NGA to report strong Q3 results, which ended in September 30.

There aren't any analysts covering the stock, but I'm expecting $0.8 EPS for the full year of 2007. This would put the stock trading at 10 times earnings, but I believe it should trade at least at 15 times earnings, or at $12 a share, say, between now and the close of Q1 2008.

I'll continue holding NGA for the long term.

[David Randolph]

NGA almost did it, close above the $8.8 short term resistance level. Perhaps today? We'll see ...

Anyway, I'll keep holding NGA whatever happens to the chart, because fundamental analysis tells me the company is worth about $14 a share.

[David Randolph]

NGA almost did it, close above the $8.8 short term resistance level. Perhaps today? We'll see ...

No, still not on Friday ... maybe today, I'll keep holding NGA.

[AussieTrader]

North American Galvanizing & Coatings Reports Record Third Quarter 2007 EarningsLast update: 10/29/2007 8:00:00 AMRevenues increase 27%, Net Income up 101%, Earnings Per Share Increase 81% - For the nine months when compared to prior year TULSA, Okla., Oct 29, 2007 /PRNewswire-FirstCall via COMTEX/ -- North American Galvanizing & Coatings, Inc. (NGA) announced today record earnings and sales for the first nine months and the third quarter of 2007. Consolidated net earnings for the 2007 third quarter were $2.5 million ($.20 per share), compared with $1.1 million ($.09 per share) in the third quarter of 2006 which represents a 130% increase in net earnings and a 122% increase in earnings per share. All per share data are reported on a fully-diluted basis and have been adjusted to reflect the effect of the June 8, 2007 three-for-two stock split effected by a stock dividend. The Company's net earnings for the first nine months of 2007 were $7.1 million ($.56 per share), compared with $3.5 million ($.31 per share) in the first nine months of 2006 which represents an 81% increase in earnings per share. Revenues for the nine months rose 27% to $68.2 million compared to $53.8 million for the comparable period last year. Commenting on the results of the third quarter 2007, Ronald J. Evans, president and chief executive officer, said "Strong overall market demand for hot-dip galvanizing continued to support the conditions for the Company to achieve record results. Strong customer demand, enhanced operating efficiencies, ongoing cost control and improved pricing, all contributed toward our record profitability. Evans added, "I am also pleased to report that the scheduled installation of a new and bigger galvanizing kettle and furnace in our Canton, Ohio facility was completed on time and budget." The plant was shutdown for approximately three weeks in early July. The Company purchased 28,500 shares of its common stock for the treasury in open market transactions at an average price of $5.33 per share during the quarter. The Company's stock buyback program has a remaining balance of $.6 million. During the first nine months of 2007, total debt (current maturities and long-term obligations and bonds payable) decreased by $6.6 million to $2.7 million. As of September 30, 2007, the Company had unused borrowing capacity of $22.5 million under its existing lines of credit. The Company also reported that the move to the NASDAQ on August 2, 2007 had been completed without interruption to stock trading activity.

[David Randolph]

Thanks Aussie

• North American Galvanizing & Coatings Reports Record Third Quarter 2007 Earnings
PR Newswire (Mon 8:00am)

This was the best quarter ever in terms of EPS, which was $0.20, but not in terms of revenue, because revenues were $21.54 M in this quarter and $23.121 M in Q2 2007.

However, management was much smarter with their talk this time. They not only didn't mention the sequential revenue decline, they mentioned their work for future growth ...

«Evans added, "I am also pleased to report that the scheduled installation of a new and bigger galvanizing kettle and furnace in our Canton, Ohio facility was completed on time and budget." The plant was shutdown for approximately three weeks in early July.»

... and even that they bought a few shares for Treasury ...

«The Company purchased 28,500 shares of its common stock for the treasury in open market transactions at an average price of $5.33 per share during the quarter. The Company's stock buyback program has a remaining balance of $.6 million.»

... also this mention to the balance sheet is positive:

«During the first nine months of 2007, total debt (current maturities and long-term obligations and bonds payable) decreased by $6.6 million to $2.7 million. As of September 30, 2007, the Company had unused borrowing capacity of $22.5 million under its existing lines of credit.»

Overall the earnings report is quite positive (especially the EPS number), the only negative being the sequential revenue decline. This can be explained by the factory being closed for three weeks or by seasonality (historically the 3rd quarter is a just a bit weaker than the 2nd - perhaps because of summer vacations, I don't know).

Anyway, we already have $0.56 EPS in the first 9 months of the year, so now I see about $0.75 for the full year of 2007, which puts NGA trading at about 11.5 times earnings.

EPS grew 81% and P/E Ratio is just 11.5 and this makes the stock very cheap from a fundamental standpoint.

It should have a P/E of at least 20, in my opinion. I'll keep holding NGA for the long term.

[David Randolph]

Beautiful how NGA was able to close the gap in today's session, this way hopefully the 3rd quarter earnings release will provide some more fuel to the rise over the short term.

Let's compare the 3rd quarter numbers with what I have in my valuation model:



1) Dilution Factor

I have 1% (1.01 in the model).

Using the following information ...



... I calculate that the fully diluted share count was 12,266,667 shares in Q3 2006 and 12,565,000 in Q3 2007. This means 2.43% dilution, so I must increase my dilution factor a bit.

2) Revenue CAGR

I have 25% and revenue growth from Q3 2007 was just 6.9%. However, if we consider the 9 months so far in 2007, revenue growth was 27%. It seems to be some loss of momentum on the revenue growth side, but maybe that was because one of its factories was shut down for three weeks (probably not because NGA has 10 plants). I should decrease my revenue CAGR estimate, say, to 15%.

3) Net Profit Margin Estimate

I have 10% and in Q3 2007 it was 11.66%. So, better than expected here. However, I think this was due to a lower tax rate. In Q3 2007 the tax rate was 31.65%, while in Q3 2006 it was 42.3%. For the nine months so far in 2007 the tax rate was 36.9%. So definitely a lower tax rate played a role in the Q3 EPS number. If the tax rate were, say, 38%, EPS would have been $0.18 and net profit margin would then be 10.6%.

4) EPS Multiple Estimate

I have 19.84, but somehow I find this hard to believe ... The Industrial & Equipment Components industry now trades at 18.05 times earnings and AZZ is trading at 15.6 times earnings.

I would say NGA will enjoy a maximum earnings multiple of 15, like in the past, remember?

I feel the need to change some estimates to my valuation model:



Oh boy, increasing the dilution factor to 2.43%, decreasing the revenue CAGR to 15%, leaving the net profit margin estimate unchanged at 10% and decreasing the earnings multiple estimate to 15 made NGA look unattractive at this point.

Actually when I saw those $9.8 in the pre-market today I felt it was a selling opportunity, but couldn't find an immediate rationale for it.

The more I study the stock market, or let me say it better, the more I study specific stocks, the more I realize how Warren Buffet was right when he said something like this:

«If it only took knowing how to divide two numbers to make big profits in the stock market ...»

I've been experiencing owning stocks with a low Price Earnings Ratio that don't go up (at least, not meaningfully), while I watch other stocks with much higher, sometimes even totally irrational earnings multiples continue to move up (like, for example, BIDU, trading at 164 times earnings and moving sharply higher ))

Investing from a business perspective tells me owning a galvanizing services company probably isn't the best long term investment idea for the Main's capital, even though the stock looks cheap from a Price to Earnings Ratio perspective.

I'm going to SELL NGA around tomorrow's open.

[David Randolph]

I don't know why, but my Reuters Data Link service (which I use to automatically update the Metastock database) doesn't recognize NGA as a stock symbol. This happens since NGA switched from the AMEX to the Nasdaq.

I just wrote Reuters Data Link to see if they can solve the problem.

In the meantime, here's a chart from www.stockcharts.com: