Material Science Steels Its Way To Growth

By Will Ashworth | January 27, 2012 AAA
According to Morningstar, one of the best performing mutual funds in the small-cap value category over a three-year period, is the Ancora MicroCap fund, with an annualized return of roughly 29%, Almost 1000 basis points higher than the S&P 500 and around 500 basis points better than its category. A quick glance at its current holdings shows me that its third largest holding out of a total of 76 is Material Sciences Corporation (Nasdaq:MASC), a tiny Michigan-based company that does some interesting things with steel. Read on and I'll explain why you might want to own this relatively unknown micro-cap. (For related reading, see How To Evaluate A Micro-Cap Company.)

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Third Quarter Results

Material Sciences released its third-quarter report on January 12 with flying colors. Revenues increased 12.9% year over year to $34 million, its earnings per share (EPS) increased 118% to 34 cents and it finished the quarter with $28.3 million in cash. The most impressive highlight of the third quarter was its gross profit margin, which expanded by 490 basis points to 27.4%. As it stands right now heading into the final quarter, its gross and operating margins will be higher than they've been in at least a decade. The only blemish I can see in the quarter was a 6.8% decline in its acoustical sales. However, any drop on that side of the business was more than offset by the 41% increase in its coated material sales, which includes ElectroBrite, a material that imitates the look of stainless steel but up to a 40% cost advantage over stainless. As the company looks to fiscal 2013, while it has some demand issues to deal with when it comes to the sale of its galvanized products, the long-term growth of its business looks very promising.

Share Repurchases

Normally I'm quite reserved when it comes to stock buybacks. Time and again, evidence suggests share repurchases do nothing for the price of a stock. More importantly, many buybacks take place near or at 52-week highs. In other words, management overpays. In the first nine months of fiscal 2012, Material Sciences repurchased 18% of its stock or 2.35 million shares at an average price of $7.19. The stock hit a high of $8.96 and a low of $6 in those nine months, meaning it secured its shares at slightly less than the average trading price of $7.48 for the period. Anytime a company repurchases its stock at an average price or better, shareholders can relax knowing their investment isn't being thrown away. I'd prefer to see it pay a special dividend with all that cash, something where the shareholder gets a tangible return, but given its market cap has never been higher than $259 million, it's wishful thinking on my part. (To learn more about share repurchase, read A Breakdown Of Stock Buybacks.)


Earnings Yield

Cash Return

Material Sciences



Chase Corporation (AMEX:CCF)



Handy & Harman (Nasdaq:HNH)



OmegaFlex (Nasdaq:OFLX)



Mueller Water Products (NYSE:MWA)




As mentioned in the opening paragraph, the Ancora MicroCap Fund invests in value oriented stocks. Material Sciences is definitely that. Its enterprise value is currently around 3.18 times EBITDA, and its stock's trading at approximately 0.62 times sales. Furthermore, its current earnings yield is roughly 13.9% and its cash return (free cash flow plus interest expense/enterprise value) is 16.5%. Both figures are much higher than its peers. With $2.69 in cash per share, estimated earnings per share around $1.11 and a stock price of $8.09 as of January 24, investors are able to buy its stock minus the cash for less than five times earnings. It might have a sporadic earnings history, but at current prices, it's worth the gamble. Especially when you consider that its share price over the past 26 years has really only traded below $5 for two years between October 2008 and October 2010. Despite the delisting that went along with its drop in price, I'll still take those odds every day of the week.

The Bottom Line

If fiscal 2013 is anything like 2012, rest assured its stock price won't be in single digits for much longer. It might even challenge $20 if its margins continue to improve. (For more information, check out What Causes Stock Prices To Change?)

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
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