United States Lime & Minerals Inc. (USLM) conducts its business through two segments: Lime and Limestone Operations and Natural Gas Interests. The Lime and Limestone Operations segment accounted for 90% and 78% of 2011 revenue and gross profit, respectively.
The Lime and Limestone Operations manufactures lime and limestone products, supplying primarily the construction, steel, municipal sanitation and water treatment, oil and gas services, aluminum, paper, glass, roof shingle and agriculture industries and utilities and other industries requiring scrubbing of emissions for environmental purposes. The Lime and Limestone Operations primarily serves markets in the Central United States and consists of open-pit quarries and an underground mine, plants and distributions facilities owned by US Lime's wholly owned subsidiaries.
Through its wholly owned subsidiary, U.S. Lime Company — O & G, LLC, under a lease agreement, US Lime has royalty interests ranging from 15.4% to 20% and a 20% non-operating working interest, resulting in an overall average revenue interest of 34.8%, with respect to oil and gas rights in wells drilled on approximately 3,800 acres of land located in Johnson County, Texas, in the Barnett Shale Formation. Through U. S. Lime O & G, US Lime also has a drillsite and production facility lease agreement and subsurface easement relating to approximately 538 acres of land contiguous to Johnson County, Texas, property. US Lime receives a 3% royalty interest and a 12.5% non-operating working interest in any wells drilled from two pad sites located on the property.
USLM is currently trading at a trailing 12 months P/E of 14.99 and a trailing 12 months EV/EBITDA of 5.94. In terms of asset-based valuations, it is currently valued at 2.09x P/B, representing a 3.6% discount to its five-year average P/B of 2.17x. USLM achieved a 13.5% ROE for the past 12 months and a five-year average ROE of 15.1%.
Financial and Business Risks
USLM has a strong financial position with a gross debt-to-equity ratio of 25% and a net gearing of 1.5%. This is helped by a strong interest coverage ratio of 11.8 and a current ratio of 3.5.
Difficult economic conditions in the U.S. have reduced demand for USLM's lime and limestone products and natural gas. Its two current largest lime customer industries, the construction and steel industries, have reduced their purchase volumes; and the reduced demand for natural gas has also resulted in significantly decreased natural gas prices in recent years.
USLM does not face significant customer concentration risks, with no single customer accounting for more than 10% of its 2011 sales. USLM's customers are considerably diversified as to geographic location and industrial concentration, with about 800 customers for the sale of lime and limestone products during 2011.
USLM incurred capital expenditures related to environmental matters of approximately $407,000 and $787,000 in 2011 and 2010 respectively. Its recurring costs associated with managing and disposing of potentially hazardous substances and maintaining pollution control equipment amounted to approximately $744,000 and $597,000 in 2011 and 2010, respectively.
Business Quality and Capital Allocation
The lime industry is characterized by high barriers to entry, including: the scarcity of high-quality limestone deposits on which the required zoning and permits for extraction can be obtained; the need for lime plants and facilities to be located close to markets and transport networks to enable cost-effective production and distribution; and clean air and anti-pollution regulations, which make it more difficult to obtain permitting for lime kilns. USLM's market position is protected with its permitted, long-term, high-quality limestone reserves and good locations and transportation relative to markets. USLM's modernization and expansion projects, its acquisitions of the St. Clair operations in Oklahoma and the lime slurry operations in Texas, and its recent South Quarry development project in Arkansas should allow it to continue to remain competitive, protect its markets and position itself for the future.
USLM has been profitable for every single year in the past decade and generated positive free cash flows in eight out of the past ten years. Gross margins and operating margins have been consistently above 20% and 14% respectively for the past decade.
USLM does not pay a dividend.
USLM has recorded double-digit ROEs for the past eight years and this is expected to continue. However, current valuations are unattractive, in addition to the fact that it does not pay a dividend.
The author does not have a position in any of the stocks mentioned.