Global Brass and Copper (BRSS, Financial) is a leader in the production of copper and other metals. Its three divisions have been around many years and supply metal for the munitions industry, housing, electronics, automotive and many other industries. Sales have been down with the price of metals, but copper has been going up. The stock trades at a decent valuation but has much of its sales going to housing and auto, two industries that are due for a pullback.
The stock trades for $28.75, there are 21.9 million shares, and the market cap is $630 million. Earnings per share are $1.70, and the price-earnings (P/E) ratio is 16.9. The dividend was recently increased from 3.75 cents per quarter to 6 cents. This would put the dividend yield at 0.8%. Not a bad valuation.
Sales fell from $1.71 billion in 2014 to $1.34 billion last year. Net income has been around $32 million per year over the last three years. Free cash flow was an impressive $60.9 million last year which would put the free cash flow yield at 9.7%. Free cash flow has been very impressive.
Global Brass has improved its balance sheet too by paying down debt. The quarter ended with $84 million in cash and $318 million in debt. I like that ratio. At the end of 2014, the company had $44.6 million in cash and $370 million in debt. EBITDA guidance for 2017 is between $115 million and $125 million.
The company has three divisions: Olin Brass, Chase Brass and AJ Oster. Global produces sheet, strip, foil, rod, tube and fabricated metal component products. Metals include: bronze, nickel, silver, stainless steel and aluminum products. These metals are used in housing, electronics, munitions, automotive, coinage and many other industries.
By volume, Oster represents 14%, Olin 43% and Chase 43%. Here is what you should pay attention to: Building represents 32%, munitions 22%, auto 16%, coinage 7%, electronics 6%, machinery 9% and “other” 8%. I find the building and auto disconcerting. Housing has been in a boom and will probably slow eventually. The auto industry depends upon seven-year financing and that too will slow.
There is a theory going around that electric cars are going to be big. An electric car uses much more copper than a conventional automobile. If that theory proves correct, it could portend good things for the price of copper and Global Brass’ stock price. As you might guess, Global Brass’ sales have taken a hit with the metals that it sells.
Olin produces brass for Orbital ATK (OA, Financial). Orbital ATK runs one of the largest munitions factories in the world in Independence, Missouri. This contract is contingent upon the military needing bullets.
Outstanding shares have barely budged over the last five years. We shareholders like that. Global is headquartered in Chicago but has operations all over the U.S. and a few other locations around the world.
The price of copper was $2.50 four months ago and now is at $2.90. This could be the saving grace for this stock. Global Brass is already trading at a decent valuation. What if housing falls off, auto falls off, and copper rises in price? I don’t know. It could be a wash or it could be a buy. Global Brass is well run, has a collection of companies that have been around a long time and is very profitable.
Disclosure: We do not own shares.
