Milacron (MZ, $8.47, $95M mkt cap).
Key Investment Points:
1. Order backlog growing. Backlog grew by $20M, or 20% sequentially, to $120M in C1Q07. The company guided 2007 sales up 4-5% from 2006 and expects results to improve throughout the year. Based on company guidance, C3Q07 and C4Q07 sales could be $220-$230M compared to $190M in C1Q07.
2. Growth coming from international regions. Most of the company's growth in coming overseas. Milacron is aggressively focusing on China and India, although they are only a small part of business now.
3. Potential industry recovery in plastics. Capacity utilization is at a 1-yr low and started rebounding recently, and equipment orders are at a 2-yr low.
4. Solid long term fundamentals. Use of plastics in cars is increasing due to lighter weight and thus more fuel efficiency. In consumer products, plastics allows for differentiated packaging compared to other materials. In building materials, wood-plastic composites are green materials using wood waste and recycled plastic.
5. Reverse split a positive signal. I think the magnitude of the reverse split (10-to-1) indicated the company is serious about turning things around and is not splitting just to avoid delisting. Fully diluted is now 11.3M shares, including the convertible pfd stock.
6. Solid corporate backer. MZ is 29% owned by Glencore, one of the world's largest suppliers of raw materials and commodities. Glencore is a private Swiss company, and it's the 6th largest company in Europe by sales.
7. Under-followed stock despite a well known brand name. I remember Milacron as a key industrial name when I was a child. MZ stock has gone straight down for the past decade, and was trading below $1 before the reverse split.
Risks:
1. MZ has $260M of debt, about $120M in convertible preferred stock, and $170M in pension liabilities.
2. High oil and resin prices are putting a squeeze on plastic producers, who are Milacron's customers.
3. MZ was breakeven last qtr on a pro forma operating income basis (ex-restructuring charges), but has been cash flow negative and net income negative in each of the past 4 qtrs. Quarterly interest expense of $8M, and $1.6M in qtly preferred dividend payments are also a factor.
Target Price:
My target price is $16, or 0.85x EV/S including pension liab, assuming the company can reach positive pro forma operating margins.
Margin of Safety:
Not much safety if things don't turn around, given the company's debt and negative cash flow. |
