Dynamic Materials - Remembering Fresh Roadkill
One of the things we are always looking for when we drift around the web, is something eye catching. Certainly the web is full of the things intended to catch your eye, but in our case, we are trying to find things that catch our investment eye.
Some of our favorite types of companies, are quiet companies that make loud noises. Maybe because we still have a bit of childhood wonder left in us, or perhaps it is our natural sense of curiosity, whatever the reason, we are simply fascinated with these sorts of companies.
So imagine our surprise when we were sent a link to a company that makes loud noises, literally, and, be still our hearts, the company even had its very own video!
The company that had us reliving our childhood was Dynamic Materials Corporation (Nasdaq: BOOM), and yep, we thought their video was kinda cool.
Financial information related to Dynamic Materials Corporation, contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2008 as filed with the with the Securities and Exchange Commission on March 13, 2009.
What They Do
Dynamic Materials Corporation is the world’s leading provider of explosion-welded clad metal plates.
Its products, which are typically used in industrial capital projects, include explosion-welded clad metal plates and other metal fabrications for use in a variety of industries, including oil and gas, petrochemicals, alternative energy, hydrometallurgy, aluminum production, shipbuilding, power generation, industrial refrigeration and similar industries.
The company is based in Boulder, Colorado, and operates three business segments: Explosive Metalworking, which uses proprietary explosive processes to fuse different metals and alloys; Oilfield Products, which manufactures, markets and sells specialized explosive components and systems used to perforate oil and gas wells; and AMK Welding, which utilizes various technologies to weld components for use in power-generation turbines, as well as commercial and military jet engines.
The stock price was range bound from about mid July through the middle of January. Since that time, the stock has moved from over bought to oversold and back to overbought.
In our opinion, the time to take a position in this stock was the last week in January, not the third week in February.
Our decision that now is not the time to take a short-term position is supported by looking at the stock's first resistance and first support prices and comparing those to a recent close.
First resistance for the stock is currently $19.12, and first support is currently $18.58. Comparing those prices to a recent close of $18.80, we simply don't believe that a potential 2% return outweighs the potential of a 1% loss.
Long-Term (5 Year Hold) Investment
While we may indeed like quiet stocks that make loud noises, we were not overly impressed with the company's fiscal 2008 financials.
As we have said many times, companies whose goodwill and intangibles exceed 15% of total assets send up red flags. In the case of Dynamic Materials, goodwill and intangibles account for more than 41% of total assets. To many investors this may seem like much ado about nothing, but to investors interested in mitigating investment risk, this has big deal potential.
In the case of Dynamic Materials, the reason is simple; the company has debt. Ending fiscal 2008 with total debt of $4.77 per share, the company paid an average interest rate of 9%.
Reducing total assets by 41%, something almost any lender would do, means the company's ability to collateralize it's debt is reduced by 41%, meaning borrowing capacity is reduced by 41%.
Lenders in turn, interpret this inability to collateralize debt as increased risk, which increases borrowing costs for the company through higher interest rates.
Certainly we have oversimplified the mechanics of debt and collateral, and in the case of Dynamic Materials, we have no inside understanding of the company's borrowing relationships.
But we do have our own understanding of risk mitigation, and since it's money we actually worked hard to earn, we happen to like the way we view this part of investment risk.
Based on a minimum five year hold, we think a reasonable value estimate for the company is in the $48-$52 range, and considering our review of the company's financial information, along with our assessment of management, we would set a buy target in the $16 to $18 range, adding to our position on pricing pullbacks, until the stock occupied a 1% position in our portfolio.
We think starting a position in Dynamic Materials at current pricing levels, would only yield childhood results, you know...it seemed like a good idea at the time.
Good ideas at the time remind us of the day we hid fresh roadkill in Mr. Di Adillo's garage.
While it seemed like a good idea at the time, once the summer sun came out, we realized that, assuming we survived this time, next time we needed to pick a garage further away than right next door.
For the Wax Ink Dynamic Materials Raw Value worksheet, please click here.