Add a Dose of Ready Mix?

bannerleftOne interesting microcap I’ve been studying recently is Ready Mix, Inc., a supplier of ready mix concrete, sand, and gravel products based out of Phoenix, AZ. As of Feb. 25, 2009, 3.81 million shares were outstanding, and 69.4% of those held by Meadow Valley Parent Corp., which was recently acquired by Insight Equity I LP. At Monday’s close of $2.42 per share, the market values the company at $9.22 million.

Like too many microcaps these days, Ready Mix trades far below its book value of 26.44 million (as of Dec. 31, 2008), with 6.04 million in long term debt and $4.2 million in cash. This substantial discount to book is most likely because their revenues and earnings were down from 2007, with annual revenues off about 20%, and earnings per share swinging from 36 cents in 2007 to a loss of 77 cents in 2008. Earnings and revenues were down in 2008 largely due to the decrease in construction spending in their primary markets of Phoenix and Las Vegas. Though management acknowledges that residential construction will not add significantly to their business prospects in 2009, one should note that housing permits were down 59% YOY in 2008, and that annual housing permits are currently at all-time lows (since the Census began tracking starts in 1959). Though residential construction will not bounce quickly in their markets, it is highly unlikely that housing starts will fall much from these levels. If that prediction proves true, Ready Mix may be currently hovering just above its trough level of earnings, and far underrepresenting its true earnings potential.

In the face of a tough construction market, Ready Mix has taken steps to further tighten its belt, even though they did close the year cash flow positive in 2008, due to $4.69 million in annual depreciation expense. For one, Ready Mix has trimmed their administrative salaries and bonuses in recent months. As of Dec. 31st, they only had 24 full-time salaried employees, with the remaining 211 employees hired on an “as-needed” basis. Furthermore, in their most recent conference call, management confirmed that no significant capital expenditures will be made in 2009.

However, the most intriguing piece of this puzzle is Meadow Valley’s majority stake. At current market prices, the remaining portion of Ready Mix is only selling for $2.82 million (i.e., 30.6% of their current market cap). In February’s conference call, management acknowledged that the cost of remaining a public company costs Ready Mix about half a million dollars per year. At current prices, Meadow Valley could take Ready Mix private and make up the capital outlay in less than six years, essentially getting the remaining assets and future earnings for free. Furthermore, it is likely that a Meadow purchase would yield additional SGA savings, as overlapping administrative functions could be streamlined or trimmed. With the Insight Equity deal now closed, Meadow Valley’s management now has the freedom to get back to growing its business and making acquisitions. Given its current stake, Ready Mix looks like an attractive candidate at a cheap price.

Disclosure: No Position

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3 responses to “Add a Dose of Ready Mix?

  1. Interesting idea but I’m not sure whether it is cheap enough for me. It doesn’t seem to be a net net which means it doesn’t offer enough downside protection for me.

    Oh and do you live in Seattle by any chance?

  2. No, unfortunately not–Seattle’s beautiful, and yes, that’s what the current banner depicts. We’re in Charlottesville, VA.

    Depending on how you run the net-net valuation, you are right, it won’t pass the test. With current assets at 15.3 mill and total liabilities at 12.9 mill (as of 12/31/08), that net current asset value is far below the current 9 mill market cap.

    Another way to value it would be to figure its liquidation value. For example, as of 12/31/08, let’s value 100% of cash at 4.2 mill, 85% of receivables at ~7.2 mill, 50% of inventory and other current assets at ~1.3 mill, and 50% of PPE at ~12 mill, for a total of 24.7 mill in assets in liquidation vs. 12.9 mill in total liabilities. The current market cap of 9 mill would be a discount to that. RMX has a big chunk in PPE (~24 mill), which is largely composed of cement trucks and batch plants, which should retain a fair resale value.

  3. WMI, an update on this idea might be appropriate given the recent sale.

    Have you done a liquidation analysis?

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