Better than Berkshire? The numbers say yes.
Is Valmont industries the greatest growth stock you’ve never heard of?
You would think that a stock which turned $10,000 into $64,415 over the most recent decade would attract a lot of ink. In reality, very few investors even have Valmont Industries (NYSE:VMI) on their radar screens.
Valmont is too small and illiquid to interest many mutual fund managers. It is not held widely enough for many financial journalists to waste time on. Most readers now click only on stories concerning stocks they already own.
The $3.3 billion (2013 revenues) company had less than 27 million shares outstanding at the end of last year, giving it a market cap of about $4 billion. Average trading volume is only about 270,000 a day. Yahoo Finance shows only five analysts with current year estimates. Just four were willing to venture guesses for 2015. Value Line’s April 18, 2014, write up calls for $10.50 in EPS this year rising to $11.40 in 2015. Both numbers would represent all-time highs.
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- BRK.A 15-Year Financial Data
- The intrinsic value of BRK.A
- Peter Lynch Chart of BRK.A
Valmont gave shareholders a volatile ride over the decade but performed well in everything that counted in terms of value creation. Earnings per share swelled by almost 900%. Dividends more than tripled and could easily have shown even gaudier growth. Valmont’s payout ratio (the dividends paid to net profits ratio) fell from 29.2% to 9.5% over the past decade as management reinvested more of the company’s profits into organic growth, a strategy that paid off brilliantly. The quarterly dividend rate is currently $0.25 per share. The last increase came during 2013's second quarter.
Money not paid out in cash is not taxable along the way. Capital gains from reinvestment will only be subject to lower LTCG (long term capital gain) rates, and then only when sold.
Those who say that "buy and hold" no longer makes sense might get an argument from long-term owners of Valmont.
Valmont’s holders earned almost five times the total return of the better-known and much revered Berkshire Hathaway’s class B (NYSE:BRK.B) shares over the same period. Both stocks showed remarkably similar patterns in terms of market action over the years.
VMI’s 10-year median multiple has been 17x. The Fed’s ZIRP (Zero Interest Rate Policy) removed any serious fixed income competition for stocks. That means historical price to earnings ratios probably understate future ones.
Thursday’s closing price of $149.98 allows investors to buy in at just 14.3x the current year’s estimate and 13.2x the 2015 expectation. Valmont is a classic GARP (Growth At a Reasonable Price) play. Buyers at 2004’s dead low made fortunes paying 17.5x that year’s final EPS. People who committed in the fall of 2011, when the market mood was bleak, got an incredible entry point at 12.3x that year’s profits. VMI shares promptly surged by more than 125% over the next 17 months.
The stock has dipped by 9% since peaking in early 2013 even as Valmont’s revenues and earnings rose nicely. A temporary lull in the company’s growth rate has provided long-term investors with the chance to get in cheaply once again.
The first quarter earnings announcement is due next Wednesday at 9 a.m. EDT. The expectation bar has been set low. VMI could be primed to start moving upwards shortly after that report has been put behind them.
Mere regression to a normalized multiple could bring VMI up to around $180 by year-end and nearer to about $200 before the end of 2015. Those target prices may end up being laughably conservative. In the five years prior to 2008’s crash Valmont often traded as high as 23x to 27x earnings. Its old low valuations used to be around 14x.
S&P Capital IQ gives Valmont high quality rankings across the board.
Value Line notes the company’s A+ financial strength and the fact that, over the long haul, VMI shares have outperformed 90% of all 1,700 stocks covered in their main research universe.
Owning Valmont is a lot like owning Berkshire Hathaway. You can be pretty sure management will create value over time and that the shares will ultimately reflect the rising intrinsic worth of the company.
Warren Buffett (Trades, Portfolio) tells people to value his company based on book value. Between 2004 to 2013 Valmont grew its assets at a faster pace than Berkshire did. It has an excellent chance of continuing to do so, coming off a much smaller base.
If you think that VMI's outperforming BRK.b in the10-year period ended Dec. 31, 2013 was just a fluke... think again. Over the 15-years ended April 17, 2014, VMI's percentage edge was even greater. Valmont showed a total return of 838% for the whole period versus Berkshire's 165% (source: Yahoo Finance).
VMI is a low-risk play, now available at a better than typical valuation level. It is among my largest personal holdings.
Disclosure: Long VMI shares, short VMI options