solvod
The Quarter
I have learned in this investment game that one can follow publicly available market information, get guidance from management teams, do the math and still be disappointed with actual results. That’s why it feels particularly gratifying when everything lines up slightly better than you had hoped. Ferroglobe (NASDAQ:GSM) just printed such a quarter.
In my last piece on the company following Q1’s stellar quarter, I said that based on those results ($243 of Adjusted EBITDA and $200 million of free cash ex working capital) I believed the company could do around $1 billion of EBITDA and $800 million of free cash. Well, through the first half of the year, the company is more than halfway to both goals, $544 million and $460 million, respectively. As important, the company has brought net debt down to $194 million. Ex the working capital build of ~$250 million, this company would be net cash right now. Based on management commentary (although I’m waiting for more from the conference call tomorrow), it could be zero net debt by the end of this current quarter. As I said in the last write-up, I expect management to get to $100-200 million of net cash and then return capital to shareholders. Since that goal seems very attainable by year end, I would expect management to at least discuss the possibilities of cash returns.
The Numbers
As usual, this company did a great job dropping EBITDA to the free cash line. Working capital building (about half inventory) are hard to keep down in such an inflationary environment. Moreover, margins were fantastic, beating Q1’s strong numbers to 31.6% operating margin (Q2 last year they were 2%). Remember, while one definitely cannot count on these commodity prices lasting forever, the company has its strategic turnaround plan that I discussed when I first wrote about the company. That plan is ahead of schedule. The company announced on their investor day that the cost saving plan was now at $225 million, up from $180 million. That would bring EBITDA in a $1-1.20/lbs silicon metal environment to $400 million. So even not counting the $400+million of cash that should be generated the rest of the year at current high commodity prices, this company is only trading at about 3x normalized EBITDA.
I am going to keep the EBITDA and free cash flow estimates the same as I used last quarter even though the company is on pace to beat both by $100 million. The stock is so cheap at below 2x both numbers, it hardly matters how far below 2x it is. I’ll also add that at today’s close of $6.87, the stock is ~7x this past quarter’s earnings and less than 4x earnings of the past six months.
Valuation
| Secured Debt | $96 million |
| Unsecured Debt (including a/r securitization & accrued int) | $357 million |
| Other financial liabilities | $65 million |
| Cash | $304 million |
| Net Debt | $194 million |
| Market Cap (188mm shares @ $6.87) | $1.291 billion |
| Enterprise Value | $1.485 billion |
| EV/2022 EBITDA (using $1 billion) | 1.48x |
| FCF Yield through the Equity (assuming $800 million FCF) | 1.61x |
| P/E (USING ONLY THE FIRST 6 MONTHS OF 2022) | 3.85X |
Conclusion
Other than Vermillion (VET), which I profiled recently, I don’t have anything in my portfolio that is this cheap. The cash flow generation is just insane here. The balance sheet is all cleaned up and there are limited amounts that need to be spent on capital expenditures. Capital return needs to be discussed next, but I suspect the stock will move before then. Just based on current cash flow, the stock should be double where it is, but I can justify a price in the $20s.
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