Top Picks 2016: Global Brass and Copper Holdings

01/13/2016 7:00 am EST


Peter Mantas

CIO, Logos LP

My Top Pick for growth investors is a global distributor and fabricator of copper and brass products, including a range of sheet, strip, foil, rod, tube, and fabricated metal component products, notes Peter Mantas, money manager for Logos LP.

There are well known risks investing in commodity-based businesses as generally the equity interest is intrinsically linked to the underlying commodity.

However, Global Brass and Copper Holdings (BRSS) is doing something quite different in its business model which is creating an uncorrelated equity issue.

The firm is measuring its operating metrics based on its ability to generate significant FCF rather than through EPS or net income, which separate the business away from the cost and revenue fluctuations associated with operating in volatile markets.

Unlike Mueller Industries (MLI)—which is more diversified than BRSS—the company has seen greater declines due a reduction in free cash flow despite seeing relatively similar free cash flow-to-sales ratios.

MLI has seen drastic decreases in operating cash flow (down over 29%) with free cash flow growth down 40%, while BRSS has seen minimal impact in EBITDA and cash flow.

The company has price to free cash flow at 4.8, a remarkably low price-to-sales at just 0.31 with a current ratio over 3x meaning not only does the company have very strong free cash flow generating capabilities but has a very healthy balance sheet to weather the storm in the commodity markets.

Book value per share at BRSS has grown by more than 250% and free cash flow growth in 2014 grew at an astounding 2183.33%.

Cap-ex as a percentage of sales is remarkably low at near 1%, indicating the very light weight nature of the business despite volatility.

Return on invested capital, a leading metric of quality, is over 17% while weighted average cost of capital is 6.16%, a healthy spread for a growing business.

Overall, the bull thesis for BRSS is that we expect to see continued strength in its free cash flow management and any stabilization of the commodity markets (for both demand and pricing) will represent exciting upside catalysts.

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