Market action remains fascinating to this value investor, especially in some of the off-the-beaten-path names that I own and/or follow. On Wednesday, the very under-followed -- with just one analyst covering the name -- Valhi (VHI) , a holding company with a not-so-small $3.7 billion enterprise value, was crushed, down 28%. On Thursday morning a little after 10:00 ET, it was already going strong, up 10%.
The shares, which had risen 8% on Tuesday, had more than tripled since Sept. 1, before yesterday's reckoning. This is certainly not an old name; it was founded in 1987. The company generates the bulk of its revenue through chemical sales, primarily titanium dioxide, which is often used as a pigment.
The selling price of titanium dioxide can swing wildly, and when it does, it usually takes VHI's share price with it on a wild ride. Wednesday's selloff in VHI followed a decision by the Federal Trade Commission to file a suit to block Tronox's (TROX) acquisition of Saudi Arabian company Cristal's titanium dioxide business, which sent a shockwave across the sector.
Valhi's holding company structure can be confusing to investors. Here is the very short version, and what has made the company so interesting to me over the years. The company is majority owned (93%) by a subsidiary of Contran Corp, so the float is on the light side (24.87 million shares out of 339 million outstanding). VHI operates through its subsidiaries, three of which are publicly traded. These include NL Industries (NL) , Kronos Worldwide (KRO) , and CompX international (CIX) -- so you can call this a sum-of-the- parts play.
VHI owns 83% of NL ($700 million market cap), NL owns 30% of KRO ($3.16 billion market cap), and VHI directly holds 50% of KRO. NL also owns 87% of CIX ($168 million market cap), which effectively means that VHI has a huge stake in CIX via ownership of NL. Confused yet? I know that I have been, over the many years that I've tried to get my arms around this story. But something finally clicked in late September, and I initiated my first position in the name.
Value investors rarely receive instant gratification from the positions they take. However, early on VHI has been the epitome of instant gratification, even if you include yesterday's drubbing. What had been driving VHI was the performance of KRO, which was up 30% in the past three months, prior to yesterday's 11 % haircut, and NL, which has doubled since early September, before giving back 11.5% yesterday.
Operating performance has been improving; rolling it all up to VHI, third-quarter revenue rose 26.5%, and the company reported earnings per share of $0.13, above the $0.12 that the lone analyst covering it was expecting, and up from $0.01 for the same quarter last year. For the first nine months of 2017, revenue is up 23%. Given the cyclicality of the business, in any given year it is feast or famine for VHI, and it appears that we were in the midst of a feast, at least until yesterday.
Life as a Valhi shareholder is like a roller coaster; this was a $20 stock four years ago, and became a $1 stock three years later. VHI does pay a $0.02 quarterly dividend, and currently yields 1.5% -- but it certainly is not for widows and orphans.