Thursday was a semi-big day for sum-of-the-parts value play NL Industries (NL) which rose 24% after a settlement was reached between a group of companies, including NL, Sherwin-Williams (SHW) and ConAgra Grocery Products Co., and California government officials in a 19-year-long lawsuit regarding lead-based paint. This suit has been an overhang on NL for quite some time; it appeared to have been settled in May 2018, but was later overturned by the courts. For a long time, from its 1891 founding until 1971, NL was known as the National Lead Company.
In the meantime, NL shares have languished, down about 40% over the past year. They have made a nice recovery since bottoming in the $3 range in mid-December and are up 50% since then, but that is of little comfort to longer-term shareholders.
It was the sum-of-the-parts analysis that had this value investor excited about the name, which happens to own stakes in three publicly traded names, including Kronos Worldwide Inc. (KRO) (35.2 million shares, worth $383 million), CompX International Inc. (CIX) (10.8 million shares, worth $178 million) and Valhi Inc. (VHI) (14.4 million shares, worth $36 million). The total current market value of those holdings is about $700 million, while NL's current market cap is just $242 million. Granted, this is a complicated structure and there is cross ownership (for instance, VHI owns about 83% of NL), but suffice it to say that NL, with a current enterprise value of just $150 million, should be trading significantly higher.
That's what we deep-value investors usually believe when we take such a position, but it's never that simple, and positions can languish for years before value is realized, if it ever plays out. NL is not a well-known name, is covered by just one analyst, and operates in a cyclical and commoditized business. The company, which trades for 5x next year's "consensus" estimates, ended its latest quarter with $111 million, or about $2.30 per share, in cash and trades for less than 0.9x tangible book value per share. Granted, the company will be parting ways with some of that cash to settle the lawsuit, to be paid out over six years, but the liability is already on the balance sheet, so there is no surprise here.
While it's positive to have the lawsuit in the rearview mirror, performance of NL is highly dependent on that of its portfolio companies, most notably KRO (a member of my 2018 Tax Loss Selling Recovery Portfolio), which itself trades at 9x next year's consensus estimates (three analysts) and yields 5.3%. KRO shares are down more than 35% over the past year.
