The Monarch Cement Company (MCEM) is engaged in the manufacture and sale of portland cement. It owns
and operates quarries located near its Humboldt, Kansas plant, and its cement products are marketed under registered trademarks using the name “MONARCH.”
MCEM is currently trading at a trailing twelve months P/E of 17.62 and a trailing 12 months EV/EBITDA of 4.82. Current P/E valuations are at parity with its five-year average P/E of 17.57. MCEM achieved a ROE of 5.3% for the trailing 12 months and a five-year average ROE of 6.4%.
Financial And Business Risks
MCEM has a low gross debt-to-equity ratio of 13.3% and a net gearing of 12.3%.
MCEM is heavily dependent upon the construction industry and the level of activity in the industry. In addition, construction activity is seasonal in nature. The summer season is more conducive for construction activities, since winds and warmer temperatures tend to dry the ground quicker creating fewer delays in construction projects. In contrast, During winter months, groundwork preparation cannot be completed, when the ground is frozen. As a result, MCEM's highest revenue and earnings historically occur in its second and third fiscal quarters, April through September. Moreover, any reduction in governmental funding and consequent reduction in public sector construction activity will hit MCEM badly.
The nature of MCEM's business requires it to invest a significant portion of its cash on inventories and capital expenditures. Since 2007, MCEM is averaging about three months in inventory days. In addition, the Environmental Protection Agency has published modifications to the National Emission Standard for Hazardous Air Pollutants regulation in the Federal Register, where all U.S. cement plants have to comply by Sept. 9, 2012. Additional pollution control equipment expenditures in its Cement Business are planned over the next few years to comply with these new regulations, since MCEM does not currently meet certain emission limitations included in latest regulations.
No single customer accounted for more than 10% of MCEM's net revenue during 2011, 2010 or 2009.
Business Quality and Capital Allocation
MCEM acknowledges that it is not a significant factor in the nationwide portland cement or ready-mixed concrete business but claims to constitute a significant market factor for cement in its market area. However, cement is essentially a commodity business, where MCEM and other competitors compete mainly on price and service. Cement is produced to meet standard specifications and there is little differentiation between the products sold by MCEM and its competitors. This is also reflected in falling margins since 2010.
MCEM has paid dividends in every single year in the past decade and currently sports a dividend yield of 4% with a dividend payout ratio of 70%.
I will consider only investing in a commodity-like business if it is supported by a strong dividend yield with undemanding valuations. MCEM still does not meet my two criteria in this case.
The author does not have a position in any of the stocks mentioned.