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  Material Sciences pulls off impressive turnaround

BENJ GALLANDER and BEN STADELMANN

Tuesday, September 14, 2010

A little over a year ago, the subject of this column was little known, Illinois-based Material Sciences. At the time, the manufacturer of specialty acoustical materials and coatings was pressed by the full weight of the recession, and the humbling of its two primary markets, the automotive and housing industries. Then trading at 95 cents (U.S.), it was opined that the company had more of the physique of a plucky survivor than an unlucky casualty.

Despite the fact that the recovery has been less than robust — particularly U.S. housing, which is still groping for a bottom — the stock price has better than quadrupled to $4.25. Material Sciences is a textbook example of how, with astute, careful management, a niche company can endure a hellish stretch and live to fight another day.

First off, in a cyclical industry, balance sheet strength is vital. MASC emerged from the 2002 recession in rough condition, with $105.2 million in debt. Clifford Nastas was promoted to CEO, and he used the good years to streamline the company, aggressively paying down loans, which were fully paid off in 2006. A conservative accounting regime knocked down the value of goodwill and impaired assets.

Also key was anticipating the cycle. Though the company reported a decent profit in 2006, Mr. Nastas warned that the Big Three auto makers were in a deep decline. The entire industry was getting squeezed between higher expenses for labour, steel and other materials and unreasonable sale prices to chase dwindling market share. Of course, the awareness of the risk could not prevent a crash in revenue as the recession unfolded, but it did help to mitigate its effect on the corporation's health.

While many struggling enterprises found their access to credit severely constrained, or were forced to pay usurious interest rates, MASC maintained its bank line at a modest 3.25 percent interest rate. As many shareholders suffered dilution as corporations desperately raised capital, MASC bought back shares while they were dirt cheap, ensuring that earnings would look even better when a recovery came. And MASC was able to effectively access its book value, selling off assets without massive write-offs because their carrying value on the books actually accurately reflected what they were worth if sold.

Results from the most recent quarterly report strongly indicate that a turnaround has taken hold. Sales were up by 33 percent compared to the period last year, while SG&A expense was 20.6 percent lower, leading to a swing in the bottom line to a profit of $4.1 million, or 30 cents a share. Cash on hand increased to $26.1 million, and that's not counting another $4.9 million coming from an asset sale. A cash stash of $31 million, with only 12.9 million shares outstanding, works out to a handsome $2.40 a share. Very nice.

After such a fine move in the stock price, is it time to sell? Not from this angle, though the ever-cautious Mr. Nastas is skeptical of the sustainability of the rebound in the North American auto industry. He is pushing hard to increase sales in China, Germany, Korea, Japan and Malaysia. The expense structure is lean, not only from reduced salaries and head count, but from lower warranty claims. Book value is $5.15, with no goodwill clouding the balance sheet. There is definitely meat on those bones.

Another potential assist for price appreciation is MASC has applied to Nasdaq for a listing of its common stock. The shares used to trade on the NYSE, but were delisted when they fell under $1. Unlike many companies in those straits, MASC did not beg for a listing extension, nor did it elect to do a stock consolidation to bring up the price. Instead, Nastas accepted exile with good grace, knowing that the lack of profile in the over-the-counter wasteland was just as well, as the results for the next few quarters were going to be lousy.

Now that MASC has something worth talking about, a move to the Nasdaq makes perfect sense. It should improve trading volume and generate some analyst coverage. The sell target range is $10-$14, so a triple from the current level is envisaged, though that will assuredly be a slower ascent than the spurt over the past year.


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