Anatomy of a 3-Bagger
This one made up for a good amount of bad ones.
No, not Country Music TV.
I began buying shares in CMT in approximately 1-3 lot increments in August 2018. I ended that year with an average cost of $8.95/share. In 2019 I continued this practice, another lot here, another there, getting my average price down to $6.34 by the end of the year.
The stock in 2020 continued to fall in the first half of the year, thanks to the COVID selloff, when I made further purchases at $1.79 and $1.19. I settled at a final unit cost of $4.47 in April 2020. To be absolutely fair, the performance of the position at this time was over a 50% loss after holding for about eighteen months.
But the stock finished 2020 at $14.08.
I began selling in 2021, loosely following the Peter Cundill adage of “when it doubles, sell half.” This practice allowed me to sit with a psychologically free position, but overall, IH’s position in CMT became roughly a 3-bagger. I could have done better if I had improved my portfolio management a bit to make bigger purchases when it dipped below $3/share, or held on longer for a second jump in mid-2024. As it stands, the $1.19 lots peaked at $29/share in October 2023, good for roughly a 24-bagger from low to high.
But you know, hindsight.
What were the fundamentals? I started looking at the stock in 2016. CMT had spun out of Navistar in 1996 and is today headquartered in Columbus, OH, and showed up in a book value screen on Barchart (I don’t use Barchart anymore because they put in a paywall, but they still provide valuable information). The firm’s 1,600 employees compound, mold, and manufacture fiber reinforced plastics for mobile machinery, mainly for the US truck market (72% of revenue as of 2016 compared to 52% of revenue in 2023) with branches into construction products and marine and agricultural vehicles. At the time of my entry into the position, CMT had longstanding relationships with Navistar, Volvo, and Paccar – each in excess of 15 years and each contributing over 20% of revenue.
The company had seen revenue growth from a trough in 2013 of $144mm to nearly $200mm in 2015, with EPS about $1/share over that time and an ROE in excess of 10% annually. This enabled total assets to outnumber liabilities roughly 2:1 by 2018, with total debt of $56mm. However, the company began seeing operating difficulties in 2016, with revenue pulling back to the $140mm range before an acquisition sending the total top line to $250mm+.
The pullback in price in 2018-19 (my entry period) was fully justified, as the company posted two consecutive net losses in those years. Total debt to EBITDA was 4.6x, which for a private company would have been steep, but for a public company was normal.[1] But the market cap relative to the balance sheet fundamentals was still strong, with market capitalization of $65mm by mid-2018, meaning I was buying the shares at EV/EBITDA of roughly 10x. This level was roughly in line with private market cash-flow leveraged finance transactions at the time, but with significant balance sheet support, lending me additional comfort on price. My aggregate position in market capitalization terms was at the $25-30mm level, and in 2020, assets outnumbered liabilities 2.3:1, by my estimates a 15% improvement.
Today, CMT is still a strong position, trading around $18 a share at a market cap of ~$170mm. Thanks to acquisitions and expansion into adjacent markets to round out trucking, power sports, building products, and other project-related plastics, CMT has shown astounding revenue growth over the past 10 years, doubling to more than $350mm of revenue. The company now targets revenue growth to over $500mm by 2028, a 40%+ expansion. So much for a cyclical, longstanding industrial name (albeit with middle-market characteristics).
Its balance sheet is still strong, with current assets outnumbering total liabilities 1.45x. The way I see that, in a liquidation scenario the current assets can take care of all outstanding liabilities, and for the price of $170mm, you net out the $80mm of manufacturing facilities for a residual $90mm Capitalization, meaning this net EV is about 2.25x EBITDA of $40mm – an absolute steal relative to even the private markets. Not to mention operating leverage of 0.6x (!) on long-term debt of $23mm.
Medium rare bone-in ribeye with a side of garlicky broccoli rabe and a glass of Malbec.
Inverness Holdings no longer holds a position in CMT.
[1] During 2016-2020, the US private debt markets were seeing leverage up to 4.5x on a unitranche basis, with senior/total leverage at 4x/6x, respectively. The public markets were well in excess of this level, as high as 9x depending on the name, as banks deem public investors’ capital to be beneficial to a company’s credit profile.