GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Horsehead Seems to Be Pabrai's Most Active Investment… But Why?

December 26, 2013 | About:

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.”


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.

About the author:

Damian Illia
A fundamental analyst at constantly looking for value and income investments.

Visit Damian Illia's Website

Rating: 3.1/5 (32 votes)



Rijk40 premium member - 10 months ago
your title is misleading and your article adds no value whatsoever......
Maza1985 premium member - 10 months ago

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

Jaumepared - 10 months ago
This is helpful. Based on what I see here, I agree with you. I have rarely understood the insights of Mohnish Pabrai (Trades, Portfolio).

Ron premium member - 10 months ago

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

Philtcu - 9 months ago

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.


UVInvestors premium member - 8 months ago

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

Kfh227 premium member - 7 months ago

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.

Batbeer2 premium member - 7 months ago

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

Do tell!

Innovestors2000 premium member - 2 months ago

Zinc is projected to be in short supply. May be Monish saw that coming.

Max7777 premium member - 4 weeks ago

Pabrai believes the key to buying commodity businesses like Horsehead is buying the low cost producer. Then your downside is limited since they can still make some money if the commodity price goes down while high price producers have to shut production. But if the commodity price goes up, the lowest price producer is the one who makes the largest margin profit. Zinc the stock is such a play. Zinc the commodity prices range between 50 cent in crisis time and $2 in top boom times. a 10 cent increase in the price of the commodity zinc will have big impact on the stock. Today zinc the commodity is around $1, he feels it can easily go to $1.20 or more as economy improves.

Please leave your comment:

Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial