re MUSA - sold my position at a small profit. I tried to decipher MUSA's accounting and it's clear to me that most of the profits are not from operating the business but rather from steel inventory appreciation. I came to this conclusion after studying the balance sheet of RT, a competitor of MUSA. Contrary to MUSA, which does FIFO accounting, RT's accounting is based on LIFO (which reduces the impact of steel price changes on the income statement):
This is the critical phrase from RT's last 10Q:
Replacement costs for the LIFO inventories exceeded LIFO values by approximately $293 million and $61 million on September 30, 2004 and December 31, 2003, respectively.
sec.gov
I believe that the accounting differences are responsible for MUSA's higher gross margins relatively to RT. If so, RT appears to be fundamentally cheaper as it has a lower P/S ration. I also believe that the cash flow (which is more important than the earnings statement) favors RT. In any case, RT appears neglected and quite cheap relatively to MUSA, so I am contemplating buying RT.
I think both RT and MUSA earnings are very dependent on steel prices. Both carry a little bit less than a quarter worth of revenue on their books. Both had negative free cash flow during the last year, as the appreciated inventory sucked up more and more cash. If steel prices ever go down, let's say by 20% in a quarter, both companies are in for a world of hurt,but MUSA much more so than RT. MUSA would show a loss of about 50M$ in this case, RT would be more shielded since they still carry a substantial discount in the value of their inventory. |
