As usual, here is the “Twitter version” (112 characters): Confused about Conrad, surprised about Austin, disappointed by San Antonio and an interesting observation in LA.
Before heading back to Texas, our next destination (after Dallas, see Part I) was Conrad Industries at Morgan City, Louisiana. The company’s share price has almost doubled since we made our initial investment so with that visit, we aimed to strengthen our familiarity with that company and the industry in which it operates.
The shipbuilding business is cyclical — it’s cycles could be violent and destroy value for those who buy in at the wrong time or buy into companies with management team that can’t manage well through the cycles. That said, our main goal going into the meeting was to understand the cycles in the domestic shipbuilding industry and learn about how Conrad positions itself. We knew that the business was suppressed after the BP “Deepwater Horizon” oil spill and the business was earning well below its true earning power at the time we made our initial investment. However, at this point we felt we need to reassess the situation so we arrived to Morgan City. Wearing suits. And what a mistake wearing a suit was!
The CFO, Mr. Hernandez, and the COO Mr. Frickey kindly spent half a day with us — they showed us the shipyards, took our questions and had lunch with us. After that meeting, I can say two things: 1, We understand the business dynamics and the industry much better than we did before. 2, The current cycle is very difficult to understand because of the energy boom in the US created new demand that didn’t exist before.
Let’s look at some numbers that show what happens since the 2010 oil spill:
The table clearly shows that Conrad enjoyed an industry-wide growth, as Warren Buffett likes to say “a rising tide lifts all boats” (you have to admit that this quote fits well for a shipyard business!). Can this industry growth persist going forward or is the market over supplied with ships? Unfortunately, even after the meeting our question was left unanswered as it seems like industry participants, Conrad included, have no special insight to offer, mainly because the energy boom is not a part of the normal cycles in this industry and it may last for many years. However, Conrad does act responsibly:
– It has no net debt and a conservative balance sheet
– Many of the costs in the business are variable
– It expands in phases, so even with the new shipyard, it opens one dry dock at a time, depending on the demand
So, Conrad seems to do well on the things that it can control.
We had many more insights from that visit but I don’t want to make the post too long. The bottom line is that we are unsure where we are in the cycle and this investment is no longer the no-brainer that it was until not too long ago. If you have any thoughts or insights on this I’d love to read it in the comments section below. Here are some more pictures from that exciting visit:
After the visit to Conrad’s shipyard we had a few days until our next meeting, which wasn’t that important and was mainly in order to learn something new about a company that we were curious about. We were happy to visit small places like Beaumont and Denton and big cities like Austin and San Antonio. Texas felt like a different country: different accent, different culture, different food and a lot of “state pride.” Surprisingly, throughout various conversations we had we heard more than once that some people think Texas should be an independent state. The state’s lone-star flag can be seen everywhere and the Texas-star is imprinted everywhere on roads and bridges. It’s no secret that Texas’ economy grows much faster than the rest of the US and many good things are happening there so I wasn’t that surprised to see how proud of their state Texans are.
Austin is truly amazing — it has everything one looks for in a big cities — good restaurants that serve healthy food, clean air, good infrastructure, many entertainment options and beautiful streets. I didn’t expect that from a small city in Texas. See it for yourself:
San Antonio was a huge disappointment in terms of the city. There are sketchy people in the streets, drug dealers and people who look at you in a way that makes you afraid to take your iPhone out of your pocket. We stayed at the Marriott Rivercenter, which is located in what supposed to be a good area. Anyway, we didn’t come to SA for tourism’s sake but to meet the management of a fast growing company that the market rewarded with a price to earnings ratio of 30. This is not the type of investments that we are after but we liked the story and we thought that it will be worthwhile to meet with the people who run this fast-growing business. The meeting went pretty well but we were not convinced that the company — promising as it may be — is worth its current valuation. We just put it on the watch list for now and we hope to be able to buy into it at a more reasonable valuation that will provide us with downside protection. The company is called XPEL, in case you are interested. We are not, yet.
San Antonio was our last stop in this action packed trip. Assaf and Nathanael went to NYC and from there back to Israel. I came to visit LA for the first time since 1996 and had a warm reception by my good friend Todd. On my first day in LA I spoke more Chinese than English and I wasn’t sure whether I arrived in Shanghai or in LA. I also encountered something that smells like a big bubble but I will leave that for the next post so stay tuned.