Metalico Inc. (MEA)

[polkamatic]

Article: "Metalico: Who Says That There's No Value in Trash?"
Thursday July 12, 7:19 am ET

Smallcap Investor submits: Metalico Inc. (AMEX: MEA - News) doesn’t just talk trash. The metal recycler is turning in big profits by rummaging through junkyards for thrifty finds, and reselling these in useful forms. Metalico then turns around and buys the junkyards as well. Not a shabby strategy: the company has a three-year annualized revenue growth rate of 51% and an earnings growth rate of 30%.
Cranford, N.J.-based Metalico has grown into a $250 million business by gathering industrial and obsolete scrap metal, processing it and selling the recycled metals to customers, including integrated steel mills, foundries, secondary smelters, aluminum recyclers and metal brokers. Its principal business segments are ferrous and non-ferrous scrap metal recycling, and fabrication of lead-based products. It has eight recycling facilities through New York, Pennsylvania, and Ohio, and five lead fabrication plants in four other states.

For Metalico, bigger is better. Late last week, the company replaced an existing loan arrangement with a new six-year deal that includes a $63 million revolving line of credit, plus access to funds for machinery and equipment. Metalico also arranged term loans for $50 million. The money will go toward the purchase of Annaco Inc., a scrap metal recycler in Akron, Ohio, and for most of the outstanding capital stock of Newark, N.J.-based Totalcat Group Inc., which recycles and manufactures catalytic devices.

“These financings support the major steps we’ve taken and will to continue to take to position Metalico as a significant player in our industries,” said Carlos E. Aguero, Metalico’s CEO, in a press release. Funds from the financing also will also be used for future acquisitions, working capital, and general corporate purposes.

This isn’t the first time Metalico has fattened up on junk food. The company is a late-night regular at the drive-through window. Analyst Christopher Bamman at Morgan Joseph said in a June 21 report that Metalico has successfully completed 20 acquisitions in the past ten years.

Here’s another opportunity: shredding old cars. Metalico currently sells about 5,000 tons to shredders each month and has been actively seeking to buy an auto shredder of its own. Bamman says such an acquisition could add “an incremental $48 million in revenue per year starting sometime in 2008."

All’s a little unsettled on the shredding front, though. Metalico wants to develop its own car shredder in New York, but there are permit issues associated with the establishment of a shredder on the chosen site. CEO Aguero indicated on the company’s first quarter conference call April 24 that an announcement was near: “As far as the shredder, we are nearing the point at which we can probably announce what we will be doing there, but we're not ready to do that yet.”

An auto shredder would add a lot of coppers to Metalico’s bottom line. Sales in fiscal 2006 ended Dec. 31 were $207.7 million, up from $155.2 million in 2005. The company earned $0.40 per share in 2006, up from $0.23 in 2005.

In the first quarter, EPS rose to $0.12 on revenues of $51.8 million, up from EPS of $0.11 on revenues of $47.2 million in the year-ago quarter. Metalico also has enviably low debt; its ratio of long term debt to equity is a measly 0.19 based on first quarter data.

Metalico is on the best ideas list of sustainability and resource optimization companies covered by Eric Prouty at Canaccord Adams. "We're a big fan of the scrap industry," Prouty told SmallCapInvestor.com. "The long term secular trend for the industry is fantastic."

Prouty said the new financing agreement last week pushed the market capitalization of Metalico over $250 million and brought the company's debt to $30 million. That level of debt is not a concern considering the type of business Metalico operates in, he said. Canaccord Adams has an investment banking relationship with the company.

Bamman issued his June report as he initiated coverage of Metalico with a “hold” rating, standing on the sidelines for now because of valuation. Metalico’s strategy has worked so well that it trades at a multiple above its peer group. Bamman did, though, say he is positive on the outlook for the company longer term, adding he believes the company is “ideally positioned to take advantage of the favorable environment in the scrap metal recycling and lead fabrication industries.”

For 2007, Bamman estimates earnings at $0.52 per share on revenues of $225.3 million. Based on this estimate, Metalico sports a PE ratio of 16.96. On Tuesday shares closed at $8.87, not far from the 52-week high set Thursday at $9.12.

Despite its valuation, there’s a lot of iron left for Metalico to pump. No steroids necessary: recycled metals sales for the industry are $30 billion and growing. There are more than 1,000 independent recyclers with more than 3,000 operating locations to pick through.The top 20 of those companies control about 35% of the industry, so there is lots of competition but also lots of choices for appropriate acquisitions.

But risks exist, not the least of which is the volatility of commodity prices. Domestic or global economic slowdowns, competition for sourcing scrap, the pricing of scrap metal substitutes and labor costs can hurt results, Metalico said in its annual report. High lead costs, for example, could reduce demand for the company’s lead products by making non-lead alternatives more attractive. The company also acknowledged that an unsuccessful acquisition may strain its resources.

And turning aluminum scrap into cans, unwanted copper into wiring and brass bits into building fixtures is dirty work indeed. Metal recyclers, with all their torching, briquetting, shearing, cutting and baling, make a mess. Metalico is subject to government regulations and environmental laws that deal with waste handling and pollution, among other things. There are lots of permits to collect, and significant liabilities and costs if regulations are violated. Because laws are likely to become stricter in the future, Metalico faces rising compliance costs.

Still, Metalico seems to have found the right strategy for the industry, and it is mitigating risks by blending different metals and varied, complementary approaches to its business. Who would’ve thought you could get rich by taking out the trash?

MEA 1-yr chart



Disclosure: none

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