(Written 8 April 2008. Consult 'Investment Approach' tab for outline of what criteria gets a firm on the research list).

90/100 quantitatively on recorded 2007 over 2006 accounts. Qualitatively the equity is set to decline along with US capital project spending - the typical how-far-how-deep collateral victim of macro uncertainty. But the firm’s stunning financial turn around from being a below average multi-business performer to the number 2 or 3 specialist in its niche leaves it superbly placed in a fragmented sector ready for consolidation. The latest 10K is here.

Infrequently does a company that has done as consistently well on its internal financials as North American Galvanizing (NGA) appear. The only half reasonable complaint is dilution of the equity base in 2007 – and that has been rectified since by a $2m share buyback plan. In broad terms there is nothing else in the annual financials worth picking over. Where the firm is vulnerable – on zinc prices, for example, its second largest expense – it is as a result of uncontrollables.

Still, having said all that, the prior year comparables are soft - NGA has emerged from fairly dire straits rather than making its astounding progress from an already efficient position. Today it is one of the largest galvanizers in the US with a 10 plant network, one of them the largest in the southern half of the country. Notable competitors include Aztec with a larger but older set of plants; AAA Galvanizing, a private mid-west based firm; and the north-east based Voigt & Schweitzer, originally German but owned since 2005 by the UK’s Hill & Smith Holdings plc.

It is the future that looks tricky. Previous price rises in zinc were passed onto customers, a feat only possible in periods of strong demand; and the nightmare scenario is sharply lower US capital project spending by (in particular) the petrochemical, utility, paper and public sectors coupled with uncomfortable zinc appreciation (in a reversal of its current trend).

Some market perspective is helpful. Six years ago the US Federal Highway Administration published a study “Corrosion Costs and Preventive Strategies in the United States” a mercifully brief synopsis of which can be read here. The study suggests that corrosion costs the US 3.1% of GDP annually, a figure curiously rounded up to 4% on at least two galvanizing industry association websites. Either way, it is a big number – circa $276bn and much of it maintenance as well as new project spending.

Separately, the US Department of Commerce, in a decade old study, estimated the ‘hot dip’ galvanizing (HDG) market in the US to be $1.4bn. HDG is NGA's sector and is the most widely used form of anti corrosion for fabricated steel. On both a life-cycle cost (in most cases) and straight forward durability basis, it is the method of choice for large projects. There exists a superior, near zero-emissions, galvanizing process called thermo-diffusion but it relies on comparatively small ovens rather than large molten zinc dips and is thus limited to the protection of smaller pieces of metal.

The bottom line is that while old technology HDG is not about to disappear in spite of a distinct lack of environmental credentials; and there is also a political will (it seems) to widen the use of anti-corrosive treatments it is difficult to see galvanizers enjoying the strong demand that has characterized the last two years. Yet it is also difficult to see their markets – mostly built around long term planning expenditures or periodic maintenance – collapsing.

Against that backdrop the ungeared NGA generates so much cash that its likely medium term outcomes will include some combination of:

  1. More share repurchases
  2. The start of dividend payments
  3. Incremental, tactical market positioning acquisitions
  4. A larger, company transforming transaction with a regionally complementary rival
There is no way to sex-up glavanizing as an investment story. But beyond the quarterly noise the impressively run and performing business operations of NGA should at least be on the watch list.

Exhibit: North American Galvanizing tear sheet




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