Institutional investors are buying Synalloy Corp (SYNL) at 10x free cash flow. The company initiated a stock repurchase program, which will most likely increase the demand for the stock. Insiders are also buying shares. On top of that, the company is acquiring other small competitors at cheap valuations. I believe that the acquisitions will make the SYNL’s share price increase. In 2021, SYNL may have to negotiate its debt with lenders. If they reach an agreement, the company’s share price will most likely increase from 2022.
Founded in 1945 and headquartered in Richmond, Synalloy Corp sells and manufactures metals and specialty chemicals. The company’s most relevant business segment is the metals segment, which was responsible for 79% of the total revenue for the year 2020:
I believe that value investors would be very interested in the company’s business profile. The management appears to be ready to grow through acquisitions, which could lead to sales growth generation. The most recent acquisitions were made at low valuation ratios.
Source: Company’s Website
In my view, if metal prices increase, the company may benefit from it. Notice that according to the company, an increase in the nickel price will lead to an increase in the amount of revenue. In 2021, inverters saw a significant increase in the price of nickel. Hence, I would be expecting sales increase in 2021:
Nickel prices are currently at a relatively low level, which reduces our manufacturing costs for certain products. When nickel prices increase, many of our customers increase their orders in an attempt to avoid future price increases, resulting in increased sales for the Metals Segment. Conversely, when nickel prices decrease, many of our customers wait to place orders in an attempt to take advantage of subsequent price decreases, resulting in reduced sales for the Metals Segment. Source: 10-k
With that, Synalloy Corp does not really operate in a growing market. According to experts, the company’s target market will grow at a CAGR of 2.8% from 2017 to 2023.
Metal and Metal Manufactured Products Market was valued at $710,531 million in 2016, and is projected to reach at $866,605 million by 2023, growing at a CAGR of 2.8% from 2017 to 2023. Alliedmarketresearch
Synalloy Corp: The Company Uses A Significant Amount Of Debt
In the last quarter, Synalloy Corp released $206 million in assets, and close to $188 million in total liabilities. The most significant assets are inventories worth $85 million, and property and equipment worth $35 million. The amount of goodwill and intangible assets are not significant. Hence, I am not afraid of impairment risks:
Value investors will perhaps carefully study the total amount of long term debt. In the last quarter, debt was equal to $60 million with long term operating liabilities of $32 million. The company’s long-term financial obligations are approximately equal to the total amount of inventories. I believe that the company is using debt to finance its operations and inventories. I am not really worried about the current amount of debt.
The company’s free cash flow is equal to $14 million, so debt/free cash flow ratio is 4x-5x. Of course, the company has a significant amount of leverage. Long term shareholders will most likely not be surprised by the total amount of debt used by Synalloy. In the past, the company used a large amount of leverage. In my opinion, in the last 50 years, bankers have been financing Synalloy. I don’t really see why they would not do it any more:
With that, the year 2021 could be a bit stressful for the management. Notice that the company may have to renegotiate a revolving credit facility payable in 2021:
The Company Does Not Report Positive Net Income, But Positive FCF
Don’t get me wrong. The numbers in 2020 were not brilliant. According to the management, sales declined quite a bit in 2020 because of COVID19. Besides, the gross profit margin declined from 9% in 2019 to 8% in 2020. The operating losses were also detrimental in 2020. The company went from a loss of -$1.7 million to a loss of -$31 million:
If you look at the income statement only, Synalloy Corp appears to be a declining business. The cash flow statement looks better than the cash flow from operations statement. The company reports both positive cash flow from operations and positive free cash flow. In my opinion, the company’s ability to generate free cash flow makes the company a hidden gem.
The company’s free cash flow was stable in the last ten years. When more value investors get to understand this fact, I believe that the company will trade at a rich valuation.
Stock Repurchase Program – The Company Appears Undervalued
I commenced research about SYNL because the company’s EV/Free Cash Flow is 10x. I believe that value investors will be happy to know about the current valuation of SYNL.
In my opinion, there is a lack of liquidity in the market, which explains why the company trades at the current price mark. If more investors study the company’s financial statements, liquidity could increase. As a result, the share price may increase.
There is another reason to believe that SYNL’s stock price could increase. In 2020, the management decided to start a share repurchase program. If the share count decreases, the intrinsic valuation of each share will increase.
The company bought a significant amount of stock at $10.65. I don’t believe that SYNL would buy shares at an expensive valuation. With this in mind, notice that currently market participants are buying and selling shares at $9-$9.9.
The Acquisitions Could Make The Valuation Increase
The company is making very interesting acquisitions. In 2019, SYNL bought ASTI for $21.9 million. According to the annual report, the company paid 0.64x ASTI’s annual revenue. In my opinion, if SYNL continues to make such great acquisitions, more investors will acquire shares:
“On January 1, 2019, ASTI completed the American Stainless acquisition. The purpose of the transaction was to extend and enhance the Company’s on-going business with additional capacity and new technological advantages in the production of stainless ornamental tube. The purchase price was $21.9 million. American Stainless will also receive quarterly earn-out payments based on ASTI’s revenue for a period of three years following closing. The tangible assets purchased and liabilities assumed from American Stainless included accounts receivable, inventory, equipment, and accounts payable.” Source: 10-k
In 2018, the acquisition of MUSA was also made at 0.9x sales, which I believe is quite cheap. Again, I appreciate quite a bit this acquisition:
On July 1, 2018, BRISMET acquired Marcegaglia USA, Inc.’s (“MUSA”) galvanized tube assets and operations (“MUSA-Galvanized”) located in Munhall, PA. The purpose of the transaction was to enhance the Company’s on-going business with additional capacity and technological advantages. Source: 10-k-2019
Synalloy Corp is a publicly traded company. Synalloy’s market capitalization/sales ratio will usually be more significant than the ratio seen in the private markets. Synalloy Corp can buy small companies at cheap valuation ratios in the private market, and sell shares in the public markets at expensive valuations. With this in mind, I believe that more acquisitions could make the company’s valuation grow.
Insiders And Investment Funds Are Buying Shares
I identified a significant amount of insider trades. In the last 12 months, they acquired 257,435 shares, and sold only 69,328 shares. Undoubtedly, they believe that the share price is about to increase:
That’s not all. There are numerous institutional funds with large stakes in the company. It cannot be a coincidence. In my opinion, money managers believe that the company trades at a discount. Dimensional funds, Royce and Associates and Blackrock hold shares of Synalloy Corp.
Conclusion: The Company Is A Hidden Gem
Trading At 10x FCF, Synalloy Corp is buying its own shares along with insiders and institutional money managers. Many people believe that the company’s stock price will increase in the coming months. That’s not all. Synalloy Corp is also acquiring smaller competitors at less than 0.91x sales. In my view, if the number of businesses acquired increases, the valuation will most likely increase. With regards to the amount of debt, I believe that the company will reach an agreement with lenders. Of course, the company has been around since 1945. In my view, banks know well that Synalloy Corp will continue to report sales. Synalloy will be able to pay its debts in the coming years.
Disclosure: We don’t hold shares.