Running an eye down the Undervalued Predictable screener at GuruFocus, we come across a small cap that generates predictable earnings, and is classified as undervalued to boot.
A small cap with predictable earnings seems unusual, and an interesting possibility. But as we’ll see, this supplier to the cabling and pipeline industries isn’t for every investor.
Still, it’s a nimble and growing contender for the attention of the right investors, a company that actively acquires and divests to align itself with the markets it serves.
Chase Corporation (CCF, Financial), based in Bridgewater, MA, has a market cap of approximately $320 million and describes itself as "...a leading manufacturer of protective materials for high reliability applications."
History
1946: Francis G. Chase and two sons found Chase & Sons, Inc., to make and sell rubber pants for wear over cloth diapers.
1950s: The company uses its original expertise to develop a line of insulating, binding and bedding tapes for the wire and cable industry.
1960s: Grows its wire and cable business, and develops strategic partnerships with related businesses.
1970s: Becomes a public company through a reverse merger transaction with Columbia Technical Corporation; name change to Columbia Chase Corporation (Boston Stock Exchange: CTE). Columbia Technical previously developed HumiSeal conformal coatings for the electronics industry. The company also acquires Royston Laboratories. The company’s shares now trade on NYSE.
1980s: The Company’s founders retire, and along with a new leadership team (but still family members) the name changes from Columbia Chase Corporation to Chase Corporation and it divests non-core businesses.
1990s: Growth of core tapes and coatings businesses: Chase & Sons (Wire and Cable), Humiseal (Electronic Coatings), Royston (Construction – Pipeline Coatings). The company also diversifies into Electronic Manufacturing Services.
2001: Acquisition of Tapecoat assets (anti-corrosion products)
2003: PaperTyger® trademark acquired (laminated paper that is tear and water resistant)
2005: Acquisition of Concoat Holdings Ltd. (Concoat later renamed HumiSeal Europe)
2005/2006: Capital Services Joint Systems purchased, along with some parts of E-Poxy Engineered Materials - these two acquisitions are combined to form what is now called the Expansion Joints product line
2009: Buys C.I.M. Industries Inc. (coating and lining systems)
2012: Acquires NEPTCO Incorporated, a "...provider of engineered materials used in the production of copper cable and electronic packaging products...."
2013: sells Insulfab® product line
Chase Corporation history based on information provided at the company website and in its 10-K Report for fiscal 2013.
Takeaways: A focused tapes and coatings company that has actively bought and sold businesses to position itself. Family-led since 1946.
Business Overview
The company now describes itself as "...a leading manufacturer of protective materials for high reliability applications throughout the world." It has two operating segments: Industrial Materials and Construction Materials.
Industrial Materials represents products used in or integrated into the products of other companies. These include:
- Specialty tapes and related products
- Insulating and conducting materials for manufacturing electrical and telephone wire and cable
- PaperTyger® a trademark for laminated durable papers sold to the envelope converting and commercial printing industries
- Flexible packaging for industrial and retail use. Slit film for the building wire market and for telecommunication cable
- Flexible composites and laminates for the wire and cable, aerospace and industrial laminate markets
- Chase BLH2OCK®, a water-blocking compound sold to the wire and cable industry.
- Protective conformal coatings under the brand name HumiSeal®, moisture protective electronic coatings sold to the electronics industry
Construction Materials represents construction products, and primarily sold and used as "Chase" branded products in their final form. Construction products include:
- Protective pipe coating tapes and other protectants sold to oil companies, gas utilities, and pipeline companies
- Rosphalt50®, a polymer additive for applications such as waterproofing of approaches and bridges, ramps, race tracks, airports and specialty road applications
- Waterproofing sealants, expansion joints and accessories for the transportation, industrial and architectural markets
- Technologically advanced products, including Tapecoat®, for anti-corrosion applications in the gas, oil and marine pipeline markets
- The ServiWrap® product line of pipeline protection tapes, coatings and accessories.
Revenue
The following excerpt from the 10-K for fiscal year ended 2013 shows that Industrial Materials provide just over 75% of its revenues:
Note as well the big jump in Industrial Materials revenue and Income Before Income Taxes from 2012 to 2013. That happened because of the NEPTCO acquisition late in the fourth quarter of the 2012 fiscal year.
In addition, we note that Construction Materials revenue slipped slightly from fiscal 2012 to fiscal 2013.
United Kingdom sales accounted for 7% of total revenues in 2013, and no country contributed more than 10% of total revenue.
No individual customer accounted for more than 10% of sales.
Competition
Chase reports in its 10-K for 2013 that, "We face intense competition from a diverse range of competitors...." and that some of its competitors are much larger players. Yahoo! Finance lists its main competitors (and their markets caps) as: 3M (MMM, Financial) ($94.7B), privately-held Plymouth Rubber Company (market cap unavailable), and PPG Industries (PPG, Financial) ($27B). It puts the industry (Industrial Equipment & Components) average market cap at $962M. Since Chase comes in at about $320M, its size is less than a third of the industry average.
Chase says, "We compete principally on the basis of technical performance, service reliability, quality and price."
The company spent just under $4 million for research and development in fiscal 2013. The goal of R & D spending is to generate new business opportunities within its existing product lines.
Takeaways: As the first paragraph in this section underlines, Chase is a small player in the Industrial Equipment & Components sector, but also a nimble player. As an example, the NEPTCO acquisition gave it a substantial financial boost in fiscal 2013. Overall, being a supplier to infrastructure players means its fortunes will ebb and flow with the overall economy, but within that, Chase can add more profitable lines and divest itself of less profitable lines.
Growth
Chase uses three approaches to grow its top and bottom lines:
- Acquisitions
- Internal growth
- Operational consolidation and reduction of expenses
Regarding acquisitions, the company writes in its 2013 Annual Report, "While we did not complete any acquisitions in the fiscal year, serious discussions were held with a number of prospects. As we continue to refine our overall strategic objectives, it is important to keep our acquisition target criteria in alignment. This means a sharper focus and increased selectivity in a competitive environment."
Internal growth comes from research and development, and given the nature of its markets will depend a great deal on the overall economy. More international sales of existing products should also help grow this category.
Several ongoing projects, including plant consolidations, should result in further streamlining of its manufacturing operations, which will reduce overhead costs. In addition, Chase has initiatives underway to better integrate R & D with sales and marketing.
Takeaways: Growth should continue as the company continues to look for appropriate acquisition targets and follows through on internal efficiencies.
Management
Chairman and CEO Peter R. Chase is a grandson of the founder of the company.
President and Chief Operating Officer Adam P. Chase is the son of Chairman and CEO Peter R. Chase.
Chief Financial Officer: Kenneth J. Feroldi came to Chase through its acquisition of NEPTCO in 2012; he took up the CFO’s position in August 2014
Board of Directors: Three of the seven members of the Chase Corporation board are members of the Chase family: Peter, Adam, and Mary Claire Chase (assumed to be a member of the family and described as Founder and President of the Chase Partners); other members of the board have expertise or experience in consulting, technology, and the law.
The ISS Governance QuickScore gives Chase a poor score, 9/10, on a scale where 1 is very low governance risk and 10 is very high governance risk. Chase receives five red flags, for Board Composition, Board Practices, Related Party Transactions, Pay for Performance, and Equity Risk Mitigation.
Takeaways: Investors interested in buying CCF will want to further investigate the company’s governance. While ISS serves institutional investors, retail investors should determine what lies behind the red flags (something beyond the scope of this article). Otherwise, we will simply note this is still essentially a family firm, with the advantages and disadvantages that entails.
Ownership
Gurus: Two gurus followed by GuruFocus have holdings in Chase, Chuck Royce (Trades, Portfolio) with 827,274 shares and Jim Simons (Trades, Portfolio) with 127,800 shares. Aside from Simons adding to his position, there has been no guru trading activity in the past two years.
Institutional Investors: nasdaq.com’s Ownership Summary shows 74 institutions (pension funds, mutual funds, banks, insurance companies, etc) own 4,838,216 shares, representing 53% of the company’s outstanding stock. Royce & Associates LLC (Chuck Royce (Trades, Portfolio)) is the second largest among institutional holders.
Short Interests: GuruFocus puts the shorts at 2.28%, and as the following chart shows, that’s roughly in the middle of the range this stock has seen over the past 10 years.
Insiders: Not surprisingly, for a company that remains close to its family business roots, Chase has a high proportion of insider holdings, 22% according to GuruFocus. The biggest insider holding is the Edward L. Chase Revocable Trust; Yahoo! Finance puts its holdings at 882,512 shares, followed by Chairman & CEO Peter R. Chase at 675,610 shares and President & COO Adam Chase at 219,037 shares.
Takeaways: We can say the interests of management and the company are aligned obviously, given the high proportion of ownership by the family and a family trust. Institutional holdings are significant, while short interests are reasonably low.
By the Numbers
Takeaways: We note the float is significantly smaller than the shares outstanding, because of the high proportion of insider holdings. The stock is nearing a 52-week high, it pays a small dividend but has room to grow it if wishes to do so, and that it has not bought back any shares recently.
Financial Strength
Chase Corporation receives 8/10 ratings for both Financial Strength and Profitability & Growth at GuruFocus:
Looking at details of this summary, we see CCF’s current Cash to Debt ratio is 0.71, which compares unfavorably to its history on this metric. However, if we look at the 10-Year Financials, we see the company is now being ‘penalized’ because it had no long-term debt in fiscal 2008 and fiscal 2009. So, we will disregard that ratio.
Interest coverage compared to its own history also generates a red flag for Chase. Again, though, the ratio has been biased by the extremely high ratios from fiscal 2008 and fiscal 2009, when the company carried no long-term debt.
Looking at the Profitability and Growth metrics, we see very good results overall, including EBITDA and EPS growth of more than 16% per year.
Turning to the company’s free cash flow, we have a very choppy chart:
According to GuruFocus, median cash flow growth per year over the past 13 years has been a respectable 6.2% per year.
Takeaways: While we might have been concerned about a couple of red icons showing up on the Financial Strength section, we see they reflect a non-typical situation in fiscal 2008 and fiscal 2009. The numbers for free cash flow, EBITDA, and EPS give us no cause for concern either.
Valuations
Chase Corporation earns a place in the Undervalued Predictable screener with its 4-Star predictability rating, and a valuation below its current price.
The Predictability aspect of stock valuation starts with Warren Buffet’s criteria for choosing stock; one of those criteria was, "predictable and proven earnings."Â GuruFocus modifies that a bit, describing its approach this way, "We rank the predictability of these companies based on the consistency of their revenue per share and EBITDA (earning before interest, tax, depreciation and amortization) per share over the past 10 fiscal years...."
Companies with higher predictability are expected to enjoy greater price appreciation than companies with lower predictability. On average, backtesting suggests 4-Star companies, such as Chase, can be expected to appreciate by 9.8% a year, and after 10 years only 8% of those companies would be expected to be in a loss position.
On the valuation side, the Undervalued Predictable screener values CCF at $50, using a Discount Cash Flow analysis. That’s 29% above its October 23 close of $35.28. Note that the Undervalued Predictable screener uses a slightly different formula than the DCF Calculator (on the Menu bar at GuruFocus); the latter generates a value of $41.69.
The P/E ratio currently stands at 12.9, which GuruFocus rates as higher than 86% of its peers in the Diversified Industrials industry. Here’s how the P/E looks in historical context:
Takeaways: Chase looks solid from the perspective of an investor who’s looking for predictability and value, particularly in a small-cap company.
Opportunities & Risks
This company knows how to grow itself. As the following chart shows, it has increased its revenue per share since coming out of the financial crisis (an average of 20.6% per year over the past five years):
It also has shown an ability to improve the efficiency of its internal operations: EBITDA increased 55% in the past 12 months, primarily because of the consolidation and streamlining of its plants, as well as better aligning R & D with sales and marketing.
It has a good record of acquisitions and divestitures, adding and cutting pieces of the company to suit its own strengths and market conditions.
While it has some international exposure, the extent of that remains limited. It may find new opportunities in faster growing markets.
The company reports in its 10-K for fiscal 2013 that it faces intense competition from a diverse group of competitors.
Further, it depends on a "consistent and well established customer base," so any loss of market share could have a significant effect on its sales and net income.
Overall economic conditions affect its sales and net income as well; demand for end products that use its materials depends on spending by private and public entities.
New provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act govern the use of so-called ‘conflict minerals’ (tin, tungsten, tantalum, or gold) and compliance with these provisions could be costly.
Information in this section based primarily on the CCF 10-K Report for 2013
Outlook
Taken as a whole, the opportunities and risks suggest Chase should enjoy a business as usual environment for the near future at least. That assumes, of course, no black swan events disrupt our world, but as a small company, it may be more nimble in facing them than its big competitors.
Chase should be able to continue growing, both internally and externally, using current resources to predictably generate increased earnings.
Conclusions
A small cap stock with quite predictable earnings might strike some as an unlikely combination, even a contradiction in terms. But, Chase has found a niche and ways to navigate that niche successfully.
This is still a family firm in some ways, with the advantages and disadvantages that brings to investors.
Despite the predictability, this is not a stock for conservative investors because of its size. Nor is it a stock for income investors, because of its modest dividend. And, prudent investors will want to look at its governance practices as well.
On the other hand, it may well suit investors who want exposure to small caps without giving up reasonably steady revenue and earnings growth. It may also suit those who want to make a bet on continuing economic improvement over the next few years.
　
