Geoff wrote about U.S. Lime back on February 18th, 2018. Focused Compounding members can read that article here: U.S. Lime (USLM): A High Longevity Stock in a Low Competition Industry
U.S. Lime at the time was trading around $75 per share. Today, the stock is at $130ish per share. Why is now a good time to revisit the company?
Irrespective of valuation, I really like this business. Buffett always talks about how he and Munger have filters in their head to decide instantly whether they should pass or move forward with a business. For me, the first filter is competition. This disqualifies about 99% of the businesses I look at. Will I miss a bunch of potential 10 baggers because of this?
Is this bad?
If anyone comes across a company that has stable margins on a durable product and competes mainly on a regionalized bases, shoot me an email — I’ll always be interested to hear about it.
U.S. Lime fits that bill. U.S. Lime describes their competition in their 10-K as:
Competition. The lime industry is highly regionalized and competitive, with price, quality, ability to meet customer demands and specifications, proximity to customers, personal relationships and timeliness of deliveries being the prime competitive factors. The Company’s competitors are predominantly private companies.
The lime industry is characterized by high barriers to entry, including: the scarcity of high-quality limestone deposits on which the required zoning and permitting for extraction can be obtained; the need for lime plants and facilities to be located close to markets, paved roads and railroad networks to enable cost-effective production and distribution; clean air and anti-pollution regulations, including those related to greenhouse gas emissions, which make it more difficult to obtain permitting for new sources of emissions, such as lime kilns; and the high capital cost of the plants and facilities. These considerations reinforce the premium value of operations having permitted, long-term, high-quality limestone reserves and good locations and transportation relative to markets.
Lime producers tend to be concentrated on known high-quality limestone formations where competition takes place principally on a regional basis. While the steel industry and environmental-related users, including utility plants, are the largest market sectors, the lime industry also counts chemical users and other industrial users, including paper manufacturers, oil and gas services and highway, road and building contractors, among its major customers.
In recent years, the lime industry has experienced reduced demand from certain industries as they experience cyclical or secular downturns. For example, demand from the Company’s steel and oil and gas services customers tends to vary with the demand for their products and services, which has continued to be cyclical. In addition, utility plants are continuing to use more natural gas and renewable sources for power generation instead of coal, which reduces their demand for lime and limestone for flue gas treatment processes. These reductions in demand have resulted in increased competitive pressures, including pricing and competition for certain customer accounts, in the industry.…Read more