If I was management? I'd hedge my bets and allocate a percentage of cash to both. Some buybacks and some growth capital. Buyback is risk-free return while growth-capital provides scale to the business.
Growing a business is great but why do it at the expense of shareholders if the ROI is lower? Do a nice big buyback, re-establish investor confidence in management's view of shareholder rights, and prepare the platform to being able to ACCESS the capital markets in the future.
Regarding revenue declines from depletion of oil/bromine, outdated factory equipment, etc, thats not really growth-capital but 'depreciation-replacement' to sustain the business. Such 'required investing' should theoretically be subtracted from the reported earnings IMO.
Take LPH for example: Whats the real benefit from going from 2 facilities to 3? The organic growth profile will be the same after you do the 'ramp-up' of the facility addition. Sure EPS will grow from $0.65 to $1-ish, but EPS would grow a heck of a lot more if they could spend 100M at the $1.1 share price (No way can they buy that much at the current average of course since the price would go up from such a big buyback).
The fact is, ROI is simply greater from a buyback for LPH right now than their acquisition. Significantly so. Of course, they can't really stop the acquisition easily at this point since they already deposited 80M...
When management chooses 'empire building growth' versus optimal shareholder-friendly EPS investments, that says something about how they view investors.
Note that nobody is claiming a company should spend all their cash in a buyback, simply that 100% growth and 0% buyback at a P/E of 2 makes a VERY strong statement all on its own. I'd be perfectly happy at a company utilizing 20% of its earnings on a buyback (while its at a P/E of 2) and using the other 80% for growth -- Not asking for more than that.
-Fernando
