Century Aluminum - A Classic Graham & Schloss Stock
Benjamin Graham is the father of value investing and the mentor to numerous legendary investors such as Warren Buffett and Walter Schloss. Mr. Schloss is considered one of the greatest investors with one of the longest track records of beating the S&P 500. Throughout his career, Mr. Schloss has stayed true to the value investing principles. Mr. Schloss, like Graham, looked for companies that had a long history of making money and paying out dividend. He wanted companies that sold for less than book value, and around its 5-year lows. Century Aluminum (CENX) is the kind of company that both Graham and Schloss would invest in. The company is profitable, sells for less than book value, and its shares have been beaten down.
Century Aluminum is a Delaware corporation that was formed in 1995. The company is primarily an aluminum producer. The company operates its business through one reportable segment, primary aluminum. Primary aluminum is an internationally traded commodity and its price is effectively determined on the London Metal Exchange. Its facilities produce standard grade, value-added primary aluminum products. Its current annualized production capacity is approximately one million tons per year.
Even with the demand from China collapsing, the company has seen demand in the U.S. and Europe steadily picking up. The company owns and operates four aluminum plants after recently closing down its fifth plant. Century Aluminum missed its second quarter estimates due to a combination of a plant closure and labor disputes. The company currently sells for 2.8x its 12 month trailing earnings, and 0.39x tangible book value.
Second Quarter Highlights:
- Reported a net loss of $33.9 million dollars or $0.39/share for the second quarter.
- Labor disruption cost the company $11.7 million dollars.
- Closure of its Ravenswood costed $30.0 million dollars or $0.35/share in impairments.
- Had $10.7 million dollars in unrealized gains from its 50% interest of Mt. Holly.
- Saw shipments of aluminum of 233,950 tons in the second quarter.
During the second quarter Century saw net cash used by operating activities of $6 million compared to $19 million for the second quarter of 2014. The company as well so cash and cash equivalent decrease $59 million compared to a $8.9 million increase for the second quarter of 2014. This decrease in cash and cash equivalent was caused by the company repurchasing shares under its repurchase plan. During the second quarter Century repurchased 1.2 million shares for a total cost of $16.9 million.
Century Aluminum has a earning yield of 23%, selling for less than 3x its earnings, and 3x free cash flow. The company has a tangible book value of $12.35 dollars/share and selling for $5.32 dollars/share. Century should trade for at least 10x its current 12 month trailing earnings. At 10x its earnings the company stock would sell for $12.60 dollars/share. Another way to value the company is based on its 10 year average earnings. Century Aluminum is currently selling for less than 10 year average earnings. The company should trade for at least 10x its 10 year average earnings. At 10x its 10 year average earnings Century Aluminum would sell for $16.20 dollars/share. Century Aluminum is worth up to $16.20 dollar/share and offering a pretax return of 12%.