Short Takes – MRC Global, Forum Energy and Aleris

These are deals outside our core coverage. We listen to them and capture the slides because they are on the borderline and you never know. We won’t be actively following these companies or doing more analysis but these are our quick notes:

MRC Global $MRC

Not really a growth story as it’s a big 90 year old industrial supplier. (like Grainger?)

But the “flat earth” might put them in a good position for long-term growth. (margin expansion?)

Big spenders don’t want to deal with 20,000 suppliers. MRC brings it all together for them from sources all over the world. (private label opportunity?)

Focus on the energy industry is a bit of a risk. Their revenues are linked to the capex budgets of these firms. Good now but later?

High end valves are the most important business at $1B with the best margins and growth.

Backlog gives but inventory takes away.

Forum Energy $FET

Oilfield products, consumables component important in the business.

Subsea is 20% of revenues.

All the board members “wrote a check” to be on the board?

Growth is being driven by harder-to-find oil which demands new equipment for deep water drilling, more complex wells and additional services needed around extraction, production and delivery.

Makes a full range of remote operating vehicles (ROVs). Some are small observational and others are massive construction machines. Coring machines also service mining operations.

Lots of drilling equipment as well. Fracking tools too. 15 pump trucks with massive super high pressure pipes and valves wears out in 6 months. They sell the parts that wear out.

Also makes the post-extraction processing with separators (oil/water/sand). Valves are a key product across the different segments.

Low natural gas prices stimulating US petrochemical making.

Basically the smaller player in several big markets with just one large competitor that focuses on very large projects. Provides a nice “pricing umbrella” as well.

Talks about organic growth but made 8 acquisitions in 2011 Warning added 124M in EBITDA which suggests a 4.7x multiple on what they bought.

5 acquisitions in well stimulation and completion which has been a big growth area. Several more acquisitions in the pipeline now.

Thinks they can build a $5B revenue business in 5 years.

Not a bad story considering the segment. Possibly a “growth commodity” play but will be impacted by cyclical factors along the way.

Aleris $ARS

Aluminum company that focuses on secondary Aluminum to avoid mining and refining.

$5B in revenues divided between rolled and extruded products ($3.3B revenue and $264M EBITDA) and recycling.

Owns some very high quality Al manufacturing mills in the world. Includes Koblenz in Germany that supplies high end Aerospace Al.

Some recycling facilities are the low cost, high volume producers on a global scale.

Al is a good metal. 100% and infinitely recyclable. Growing faster than other metals with economic growth and also as a substitute for other heavier and higher cost materials.

Service oriented approach. Long term contracts with airbus, boeing and now bombardier, signed an LOI with Comac which is the big player in China.

These guys can ship molten metal? That’s pretty cool. User saves 3-5c/lb from not having to melt it.

Auto recover suggests some expansion of auto body sheet Al will be growing.

Investing $350M in the first aerospace quality Al plate mill in China. $215M is non-recourse from Bank of China.

Overall a pretty boring story.

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