Buy MEA around 14.03
In the latest sign of the global commodity craze, churches in England are seeing increased thefts of metal from roofs, statues, and plaques. And last week, someone even stole the organ pipes from a 13th century church, presumably to cash it in for scrap.
Here in America, we have a little more respect for our religious institutions-so we limit our larceny to kegs and manhole covers. The bottom line is that metal prices are soaring, especially in the scrap and secondary markets. And as iron ore prices increase (Rio Tinto recently announced it secured an 85% price increase for the current contract year), scrap metal becomes an even more appealing alternative. This is not likely a passing trend- Dan DiMicco, the CEO of Nucor, the largest metal recycler, stated last month of CNBC that he sees 15-30 years of a strong continued upward trend in metal demand and prices. He acknowledged that there may be some short-term blips, but the overall trend would be sharply positive.Nucor is putting its money where its mouth is, gobbling up scrap metal operators. In February, it bought scrap broker and processor David J. Joseph (”DJJ”) for $1.4B. In April, its newly acquired DJJ platform acquired two smaller scrap processors for an undisclosed price.
According to the company, it plans to use the DJJ platform as a “a platform for continued growth in the scrap processing industry.” It also sees an opportunity for more consolidation in the industry as prices rise. And Nucor’s acquisition strategy appears to be on the fast track, as the company raised $2.05B through a recent stock offering and plans to raise an additional $1B by selling bonds for acquisitions, capital expenditures, and general corporate purposes. So who might be a beneficiary of high scrap metal prices and a dominant industry player hungry for M&A? My bet is on Metalico (AMEX: MEA). The ~$500M New Jersey-based company operates a number of ferrous and non-ferrous scrap processing facilities as well as a lead-fabrication business. The company has been acquisitive in its own right, and its blowout 2008 first quarter was a result of successful acquisitions and high demand for scrap.
The street has begun to take notice: in the past few weeks, analysts have upped their price targets on the stock to $20 and $21, citing increased worldwide demand for scrap. And although the stock has risen over 40% this year, it is currently more than 20% off its high. Analysts currently expect revenue to increase by 135% this year and at least 13% the next. Given MEA’s recent track record, this latter number seems potentially very light. Shares of steel-related companies, including MEA, tanked last week on worries over GM’s production cutbacks. This despite an earnings announcement from Schnitzer Steel a few days earlier, whose CEO stated that “Global demand for recycled metals remains robust, driven by economic growth in developing countries.” Dan Dienst, CEO of Sims Group (another large metal recycler), appeared on Cramer’s show Tuesday night to dismiss any worries. He cited the “voracious” demand for metal, both ferrous and non-ferrous, that his company continues to see. He specifically addressed the GM issue, noting that “a couple million tons in diminished production” from automakers is not going to come close to offsetting the huge infrastructure demands from BRIC countries. An analyst from UBS was out yesterday with a note to buy steel companies on last week’s overdone drop. I agree, and believe that this is one of those aforementioned negative blips in a company with a clear positive trajectory.
Between the strong demand for scrap metal and the possibility of a buyout, Metalico is a buy.
Disclosure: SmartGuyStocks is long MEA
