MEA is an industrial company operating in 3 segments, scrap metal recycling, platinum and other minor metal recycling, and lead fabrication. At its most basic level, their business is buying scrap metal, processing/stripping it, and then selling it to steel mills for ferrous materials, and other end users for higher end metals. On the surface this sounds like a straight commodity business, and the fact that the market is defined by over 500 independent recyclers operating 1,000 locations lends evidence to this thought.
While historical ROEs average out to ~10% making MEA at best a marginal business, MEA can make claims to having somewhat of a geographic moat due to the low value to weight ratio of most ferrous metals and the company’s geographic concentration (operating primarily in Western NY, Pennsylvania, and Northern Ohio). Additionally, MEA is able to maintain lower supply costs than their competitors because they own a network of scrap yards directly.
That being said, it may be premature to consider MEA a true low cost producer. While their recent management presentation points to their “industry leaning margins,” the metric they choose to measure is EBITDA. Unfortunately, interest expense costs are very real, and potentially fatal for a companies in cyclical businesses.
For some time the stock posted impressive growth through acquisitions, however the stock has been cut in half in the last few months and is down almost 66% in the last year and change thanks to commodity businesses as a whole suffering from fears of a Chinese slow down, continued depressed utilization in the steel industry, and no real evidence that the commercial construction or auto sales are about to take off. These demand side issues are compounded by supply side issues such as driver reluctance to upgrade their vehicles (old cars are a major input), growth in the number of yards bidding for scrap, and an expansion in total metal shredding capacity.
The auto upgrade cycle will work itself out eventually, but currently low oil prices are compounding the delay as driver’s are more tolerant of holding on to older gas guzzlers. The growth in the number of yards biding for scrap and the expansion in metal shredding capacity are more secular issues to which MEA is exposed.
MEA is not a good business and thus should be valued on a Book basis. I first noticed the stock because it is trading at .55 book, but ~30% of that asset value is goodwill and other intangibles, meaning that the company is trading for 1.3x tangible book… more than I would pay for this business.
However, what is interesting to me is that MEA is a roll up. With more than 20 acquisitions since the company was founded, they have greatly increased the number of facilities in their portfolio over the last 15 years. Each of these facilities is fairly liquid and could be sold to raise cash in the event of a distressed type situation.
If the operating environment remains challenging in the near to intermediate term, investors will become increasingly wary of MEA’s ability to meet their debt payment obligations and debt covenants, and it is not hard to imagine a scenario under which the company trades like it is extremely distressed.
In this situation, I could see the stock trading down another 30-50% from these levels. At those levels the stock would likely be very attractive as the assets could be sold to payback creditors. Adding to my watch list and hoping for a distressed type situation.