Disclaimer: The views expressed here are mine and may change without notice. Past performance is not indicative of future results. All investments carry risk, including financial loss. This analysis is for educational purposes only and does not constitute investment advice or recommendations of any kind. Conduct your own research and seek professional advice before investing. Please see important disclaimers here and here.
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At first glance, Webco Industries looks like a classic value setup. The stock trades at just 56% of tangible book value, has a consistent history of generating operating income, carries low debt, has significant insider ownership, and is repurchasing shares. On the surface, these are all attractive traits for a value investor. However, despite these positives, Webco does not align with my investment philosophy.
There are several reasons for this:
First, while the stock looks cheap relative to tangible book, but nearly all of that book value sits in inventory—primarily steel, since Webco manufactures various types of steel tubes. Steel is a tradable asset, but its value fluctuates with commodity prices, making book value a less reliable margin-of-safety measure.
Second, analyzing the financial statements, I see capital expenditures have exceeded depreciation for nearly a decade (Table I). This suggests that most earnings are reinvested just to likely sustain operations, leaving little cash flow for shareholders. (I note “likely” because I do not have long-term data on product volumes sold.)
Table I
(all figures in USD thousand)
Source: Company filings
Third, the company’s return on capital does not meet my standards. Moreover, over time, retained capital has not produced proportional or higher gains in market value (Table II). This reflects the company’s structural economics: low profit margins, the commodity nature of its product, and a high fixed-cost base. That said, management deserves credit for leverage management given the nature of the business.
Table II
Source: Company filings, Yahoo Finance, My calculations
My investment philosophy emphasizes protecting each dollar invested. Despite Webco’s apparent cheapness, its inventory composition, capital-intensive operations, and modest returns on capital limit the margin of safety. Both quantitatively and qualitatively, the setup does not meet my criteria. For these reasons, I will pass on the stock.
Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).
