Price per share: €5.30 (savings shares, ticker = SGR, Milan)
2011 earnings per share: €0.70
Debt per share: €1 (June 2012)
SAES Getters is the primary producer of gettering devices.
For most people, the sentence above may just as well have been written in Hebrew.
In the words of Hermann Simon: "Until I ran into this world market leader from Italy, I was unaware that a getter is chemically reactive material that helps to retain a vacuum. SAES has an 85% share in the world market for Barium getters and generates 98% of its revenues outside its Italian home market."
The thermal glazing in your home, the display of your computer, the flask you use to keep liquids warm (or cold) and the Large Hadron Collider at CERN all need a getter. Without it, they would quickly cease to function as designed.
SAES Getters’ products have been to Jupiter (the Galileo spacecraft) and Saturn (Cassini). The company’s getter technology can also be found in fluorescent lamps, night vision devices and plasma displays.
The company is listed on the Italian stock exchange (Milan). Shares are currently also listed on the London stock exchange and until 2002, were listed on the Nasdaq, too.
Paolo della Porta graduated in engineering at Polytechnic in Milan in 1949. His father subsequently asks him to help out at a small and struggling company in which he had invested, along with some partners (Canale and Baldi). At 25, Paolo takes up the challenge and develops a technique for producing an alloy of barium and aluminium. Barium has an interesting characteristic. The metal scavenges (chemically binds) traces of gas. The alloy Paolo made retains that property without being as reactive as the pure element. Barium, by itself, is a bit scary. The metal will immediately react with water or alcohol and produce hydrogen gas. This is not stuff you want in your television or radio. Paolo’s alloy was an industrial breakthrough.
In 1952, the company starts producing “ring getters” for creating and maintaining the vacuum in receiving valves and televisions. Two years later, Paolo’s father dies of a heart attack. His two partners, Andrea Canale and Ferdinando Baldi, also die that year. Paolo finds himself managing the company alone. Paolo ran the company for fifty years before handing the reins to his son.
In the 1960s and 1970s, the company established subsidiaries in Europe and Asia and the U.S. In the 1980s, the company acquired the getter business of Union Carbide, which was the main producer of evaporable getters in the U.S. Also in the 1980s, the company acquired Cryolab Inc. This permitted the group to establish an important presence in the gas purification field. This presence was enlarged to encompass trace gas analysis with the acquisitions of Trace Analytical Inc. in the 1990s.
More recently, the company acquired Mertmann Memory-Metalle Gmbh, a company specializing in alloys with another interesting characteristic. In this case the alloy "remembers" its original, cold-forged shape: returning to its pre-deformed shape when heated.
Such alloys are a lightweight, solid-state alternative to conventional actuators such as hydraulic, pneumatic and motor-based systems. Thanks to some acquisitions and significant investments in the Shape Memory Alloys field, SAES Getters has established a Business Unit capable of supplying anything from ingots to finished products shaped as wires, tubes, and tailor made stents.
Today, SAES Getters is organized in three business units:
1) Industrial applications - electronic devices, vacuum systems, thermal insulation, lamps and semiconductors
2) Shape memory alloys - medical devices and actuators
3) Information displays - LCD, CRT and OLED components
SAES Getters is a subsidiary of S.G.G. Holding. The company was founded in 1940 and is headquartered in Lainate, Italy. S.G.G. is a vehicle through which the founding families retain control.
The Group has long-term relationships with several customers including: Air Products, Intel, Philips, Osram, Praxair, Samsung, Siemens, Sony and Toshiba. As a critical step in the manufacturing process, a getter is activated within the device after evacuation with pumps. The getter maintains and helps create the necessary vacuum. Without use of a getter, the vacuum would quickly degrade due to remaining gas molecules released from the internal surfaces and other components of the device. Getters can also act as internal chemical pumps reducing the need for external evacuation pumps and resulting in improved production speed and yield.
In recent years, (hidden) growth came from the pure gas technologies business. This is largely dependent on growth and product development in the semiconductor industry. More complex, higher density semiconductors require greater gas purity and cleaner conditions in production machines to achieve satisfactory yields. The group’s pure gas technologies business area products are designed to function in such environments.
The company believes possibilities exist for expanding its gas purification business. Advanced gas purification technology can be adopted for all sorts of specialty gases. Also, advanced purification technologies are becoming increasingly necessary in other fields such as the production of Light Emitting Diodes (LED) and (fiber) optics.
Gas purification is a great business. The company installs a unit at a production facility. The client can then buy cheap industrial gas and hook it up to the "filter." The gas is "cleaned" to a very high standard by the getter. Of course, when the getter is saturated, the cartridge needs to be replaced.
Bruce Greenwald in the book "Competition Demystified" writes that there are only three kinds of sustainable competitive advantages:
1) Supply (privileged access, proprietary technology protected by patents or experience)
2) Demand (e.g. psychological or actual costs of switching - includes branding, loyalty programs, laborious setup and coordination issues)
3) Scale economics
Supply: The Group processes all of the alloys at its facility in Avezzano, Italy. Barium minerals are widely available in Italy. Alchemists in the early Middle Ages knew about barium minerals. Smooth pebble-like stones of mineral barite found in Bologna, Italy, were known as "Bologna stones." Witches and alchemists were attracted to them because after exposure to light they would glow for years.
Supply: On average, SAES spends 8% of its revenue on R&D, resulting in a number of patents and a lot of proprietary technology. Patents and technology are a fixed cost with important economics of scale. One would need to spend a similar amount on R&D with a much smaller revenue stream in order to challenge SAES.
Demand: At the exact point where the components of any vacuum device come together and are sealed, that is where you will find getter technology. Once a plant is in production, it is impossible to change that part of the process without stopping production. There’s also a risk of significantly diminished yields and/or durability of the product thereafter.
Demand: SAES’s getters last for decades. They have proof. Clients do not like to see millions of LCD screens or TV sets returned because some backlights lost their vacuum. Also, you can’t make your product very much cheaper and certainly can’t make it any better by using a cheap getter.
Demand: Long-term relationships with customers are essential in order to anticipate customers’ needs and develop solutions based on technological expertise.
L’Aquila. The region has its (un)fair share of earthquakes. SAES has important operations in Avezzano.
Customer concentration and consolidation. The customer base is concentrated and some of the industries in which the Group operates are undergoing consolidation. Some customers have merged to form new and larger companies. As an example: in April 2003, Toshiba Corporation and Matsushita Electric Industrial Co. Ltd., both of which were customers for barium getters, began operating a joint venture (“Matsushita Toshiba Picture Display Co. Ltd.”).
Family control. A red flag for many investors. While there are legitimate risks, SAES is a business that has survived many decades and generations. The families have the freedom to focus on long-term value creation, as opposed to quarterly performance.
Acquisitions. The company intends to continue to grow its business partly through acquisitions, joint ventures and investments. Such acquisitions and investments, whether conducted nationally or internationally, involve a number of risks and uncertainties.
The dividend is lumpy. The company returns cash if and when there is cash to spare.
Like most companies from Simon’s book, SAES Getters has a long-term orientation that investors are unaccustomed to seeing. The business is controlled by members of the Baldi, Canale and della Porta families. These families control 60% of the equity through S.G.G. Holding.
Within a well-managed, mature company, obvious opportunities for cost-cutting and divestments dry up. You need an inside CEO with a deep knowledge of the industry and the culture of the company to initiate strategic changes that will build a company's long-term competitive advantages. This is precisely what you will find at SAES Getters.
The CEO (Massimo della Porta) and the deputy CEO (Giulio Canale) have both been with the company since the nineties and are each paid a bit less than €1 million per annum, with no extra options etc. This makes sense since the families already own 60% of the equity. These managers, along with their aunts, uncles, brothers, sisters and children each have roughly 20x their annual salary tied up in stock.
Value and price
SAES has 14.5 million ordinary shares and 7.5 million savings shares, for a total of 22 million.
In the words of the company: "Savings shares are entitled to a preferred dividend of 25% on the implied book value; if, in one financial year, a dividend of less than 25% of the implied book value has been allocated to savings shares, the difference will be made up by increasing the preferred dividend in the following two years."
For the year 2011, the savings shares received dividends of €0.66 while the ordinary got €0.44.
For reasons that are beyond me, the savings shares, with their superior dividend rights, are cheaper at €5.30 (versus €7.50 for the ordinary). Both classes are even cheaper in London.
Until recently, FIAT industrial had a similar structure. I wrote about it here. Since then, FIAT industrial has redeemed the cheaper savings shares.
In the last five years, not the best years for an Italian industrial, the company has returned €85 million of cold cash to shareholders. €85 million divided by 5 divided by 22 million equals owner earnings of € 0.75 per share.
That’s a significant amount of money for a company with shares trading at €5.30.
Of course, the value of a company is defined as the present value of all future dividends, not past dividends.
Management has done a good job of growing the memory metal and the gas purification (=semiconductor) business. These divisions have been growing at double-digit rates. A fact that has been obscured by the precipitous decline of the backlight business. LCD displays no longer have (vacuum) cold cathode fluorescent lamps as backlights. The lamps have been replaced by LEDs. That’s why they’re called LED displays.
Whereas it remains to be seen if the gas purification and memory metal business have room to grow, it is obvious the display business doesn’t have room to decline much further. Unsurprisingly, the company reported growth in the first half of 2012.
Euro. With 40% of costs in euros and just 15% of revenue, a collapse of the euro will have a positive effect on margins. In fact, the steady appreciation of the euro against the dollar has been a significant headwind for the company over the last ten years.
Share buybacks. Like FIAT industrial, the company may redeem its preferred at a significant discount to the price of the common. This would immediately increase the economic value of the common (as held by the families)!
Sustained top-line growth going forward may catch the attention of investors. Until recently, growth was obscured by the decline of the LCD backlight business.
2011 annual report
Old SEC filings
Barriers to entry
H1 2012 report
Extensive company brief
This is not a recommendation to buy or sell anything. At the time of writing, I had no position in any of the stocks mentioned. Any and all questions welcome.