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Horsehead Seems to Be Pabrai's Most Active Investment… But Why?
Posted by: Damian Illia (IP Logged)
Date: December 26, 2013 04:58PM

On Dec.11, Mohnish Pabrai added Horsehead Holding Corp. (ZINC). It was the 13th time he added the stock during 2013, which makes me feel that Pabrai is making a bet that zinc is about to get a lot more valuable. So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity.

Warehousing and Distribution Network

Horsehead Holding Corp. is a holding company that includes subsidiaries, which are: Horsehead Corporation (a producer of zinc and zinc-based products); The International Metals Reclamation Company (a recycler of nickel-bearing wastes and nickel-cadmium batteries); Horsehead Zinc Powders (a manufacturer of zinc powders for the alkaline battery business) and Zochem (a producer of zinc oxide). The last one plans to open a “zinc center” in 2014 to serve the growing market in the southeastern region of the U.S. “Our ability to supply customers through our network of outside warehouse and distribution centers is a key service advantage of Zochem. Customers will have the choice of shipping directly from Brampton in Ontario, Canada, or from a warehouse in the Southeastern U.S. which will provide associated inventory management benefits,” said Horsehead CEO, Jim Hensler.  Moreover, the company has made huge investments in the expansion of the Zochem facility as well as the development of the management systems.

Analyst Recommendation

Although it made Zochem expansion efforts, due to disappointing results in the last quarter, the firm is currently Zacks Rank # 5 - Strong Sell, and it also has a longer-term recommendation of “Underperform.”

Valuation

In terms of valuation, its price-to-book ratio of 1.8 indicates a premium versus the industry average of 1 while the price-to-sales ratio of 1.6 is above the industry average of 1.2.

Earnings per share (EPS) increased in the most recent quarter compared to the same quarter a year ago and are below the historical 10-year average. It has demonstrated a negative trend over the past 10 years while volatile as well. We include in the next graph the stock price because EPS often lead the stock price movement.

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased when compared to its ROE from the same quarter one year prior. This is a signal of strength but still remains negative. Competitors such as Teck Resources Limited (TCK) trade for 8 times forward earnings and 0.9 times book as well as have a positive ROE. But for those seeking for a great ROE, the option should be US Ecology Inc. (ECOL).

Final Comment

Horsehead's revenue growth has slightly outpaced the industry average and despite having found a major weakness in the result of ROE, it has improved.

Hotchkis & Wiley Capital Management LLC has also been active in the company. The fund´s objective is to find undervalued companies that have a significant potential for appreciation.

I would recommend staying away from Horsehead at the time, mainly on account of its high valuation, volatile earnings and somewhat uncertain commodity prices. Instead, I would recommend investors to consider Dynamic Materials (BOOM) for your long-term portfolios if you are seeking exposure to the metal processing industry.

 

Disclosure: Damian Illia holds no position in any stocks mentioned.




Guru Discussed: Mohnish Pabrai: Current Portfolio, Stock Picks
Stocks Discussed: ZINC, TCK, ECOL, BOOM,
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Re Horsehead Seems to Be Pabrai s Most Active Investment But Why
Posted by: rijk40 (IP Logged)
Date: December 27, 2013 01:03PM

your title is misleading and your article adds no value whatsoever......



Guru Discussed: Mohnish Pabrai: Current Portfolio, Stock Picks
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Re Horsehead Seems to Be Pabrai s Most Active Investment But Why
Posted by: maza1985 (IP Logged)
Date: January 4, 2014 03:03AM

Information value of this article 0.00... better not to publish this kind bulls..t.




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Re Horsehead Seems to Be Pabrai s Most Active Investment But Why
Posted by: jaumepared (IP Logged)
Date: January 13, 2014 05:31PM

  This is helpful. Based on what I see here, I agree with you.  I have rarely understood the insights of Mohnish Pabrai (Trades, Portfolio). 

 




Guru Discussed: Mohnish Pabrai: Current Portfolio, Stock Picks
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Re Horsehead Seems to Be Pabrai s Most Active Investment But Why
Posted by: ron@ethree.com (IP Logged)
Date: January 21, 2014 12:11PM

A few things to consider here without going into too much detail: 

1.  Horsehead is the largest independent Zinc producer in the US

2.  The company is about to open a new manufacturing facility (as we speak it is being tested), which will be the lowest cost manufacturing facility stateside (management promises over $90m in incremental annual income)

3.  Their EAF dust facilities use a proprietary technology that provides low cost inputs to Horsehead zinc manufacturing and earns income for recyling waste products. Also provides predictable source of zinc via long term recyling contracts.

4.  Over the next few years, several of the world's largest zinc mines are forecast to close their doors.

5.  Zinc is an essential input to the steel fabrication process. Any small uptick in demand will positively impact the price of zinc.

Just a few thoughts... I am long Horsehead Holdings - and have been for some time now.

Cheers,  Ron




Guru Discussed: Mohnish Pabrai: Current Portfolio, Stock Picks
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Re Horsehead Seems to Be Pabrai s Most Active Investment But Why
Posted by: philtcu (IP Logged)
Date: February 4, 2014 11:06PM

Why does Monish think ZINC will be a double or triple over the next two to three years? After studying him, that seems to be his minimum threshold retunr before considering investing in an instrument.  

Phil




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Re Horsehead Seems to Be Pabrai s Most Active Investment But Why
Posted by: rrurban (IP Logged)
Date: February 28, 2014 03:04PM

Any company that relies on a commodity's price is best avoided.  Been there done that.

 




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Re Horsehead Seems to Be Pabrai s Most Active Investment But Why
Posted by: kfh227 (IP Logged)
Date: April 18, 2014 11:51AM

Took me a long time to see what hte play is in this stock.  Bought in about a month ago and think that this is going to be a wonderful investment.

 




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Re Horsehead Seems to Be Pabrai s Most Active Investment But Why
Posted by: batbeer2 (IP Logged)
Date: April 18, 2014 12:49PM

>> Took me a long time to see what hte play is in this stock.

Do tell!




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