Tuesday, August 11, 2009

Rock of Ages! (no not the song) (ROAC)

AlphaNinja - While it's also a fantastic ditty by Def Leppard, Rock of Ages (ROAC) is a very old company specializing in "memorial" products - think headstones, mausoleum products, etc.

Back to the company. Rock of Ages reported a dramatic increase in earnings this morning, with earnings per share of 19cents versus 10cents a year ago. Shares are up 12% today, to 2.71. The company reports in two segments - quarry and manufacturing, with manufacturing being the higher-margin of the two.

I just got off the phone with CFO Laura Plude, who graciously answered a few of my questions. Quarry segment results were greatly improved (see below), thanks to strong Chinese demand. I asked if the improvement in results at their Bethel White Quarry (which they cited as the big boost to earnings) could continue, and was told that not only would it continue but we might see even better improvement due to equipment repairs/upgrades and other efforts.

As they're a small company, I inquired as to the "public company costs"(auditors, SEC compliance, etc) they incur, because at this size they can be a very hefty percentage of costs. Ms. Plude said they were previously about $1million per year but have probably shrunk to $700k -->> that's still 10cents per share on a sub-$3 stock, yuck.

This quarter's results were great, but due to the seasonal nature of this business (Northeast cemeteries order virtually no product in certain months when the ground is frozen) it's tough to extrapolate a full-year earnings estimate. ROAC has lost money the last few years, so a return to profitablilty would be welcome.

I like the CFO's upbeat view, and the operational improvements that we've seen, but the nagging worry I have here is the ownership of the stock. Two brothers (the former CEO and now Chairman of the board is one of them) own most of the class B shares, which have ten times the voting rights of class A shares -->> the company is totally in their control. If things look poised to take off, there's not much (aside from a heavy debtload) to stop them from taking the company private and enjoying the upside themselves.

Looking out longer-term , the company faces basic challenges to its business, one being the shift from burial to cremation. In addition, cemeteries running low on space are limiting the amount of "memorialization" products allowed. From the 10k:

"The increasing trend toward cremation, and potential declines in memorialization for other reasons, may result in decreased sales of our products.
There is an increasing trend toward cremation in the United States. The latest statistics from the Cremation Association of North America, or CANA, indicate cremation was used in approximately 33% of the deaths in the United States in 2006, compared to approximately 29% in 2003. To the extent increases in cremation rates result in decreases in memorialization rates, this decrease will result in a decline in our memorial sales, which will adversely affect our business and results of operations.

Our business is also subject to the risk that memorialization rates may decline over time for other reasons. Certain cemeteries have in the past and may in the future limit the use of granite memorials as a memorialization option. To the extent general memorialization rates or the willingness of cemeteries to accept granite memorials declines, this decline could adversely affect our business."

The stock at these levels has discounted a lot of bad news -->> the earnings picture is cloudy, but operating results show big improvement, and the shares likely have more upside. Yet as noted above, upside comes with risks...

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