Horsehead Seems to Be Pabrai's Most Active Investment... But Why?

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On Dec.11, Mohnish Pabrai added Horsehead Holding Corp. ( ZINC ). It was the 13th time he added the stock during 2013, which makes me feel that Pabrai is making a bet that zinc is about to get a lot more valuable. So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity.



Warehousing and Distribution Network



Horsehead Holding Corp. is a holding company that includes subsidiaries, which are: Horsehead Corporation (a producer of zinc and zinc-based products); The International Metals Reclamation Company (a recycler of nickel-bearing wastes and nickel-cadmium batteries); Horsehead Zinc Powders (a manufacturer of zinc powders for the alkaline battery business) and Zochem (a producer of zinc oxide). The last one plans to open a "zinc center" in 2014 to serve the growing market in the southeastern region of the U.S. "Our ability to supply customers through our network of outside warehouse and distribution centers is a key service advantage of Zochem. Customers will have the choice of shipping directly from Brampton in Ontario, Canada, or from a warehouse in the Southeastern U.S. which will provide associated inventory management benefits," said Horsehead CEO, Jim Hensler. Moreover, the company has made huge investments in the expansion of the Zochem facility as well as the development of the management systems.



Analyst Recommendation



Although it made Zochem expansion efforts, due to disappointing results in the last quarter, the firm is currently Zacks Rank # 5 - Strong Sell, and it also has a longer-term recommendation of "Underperform."



Valuation



In terms of valuation, its price-to-book ratio of 1.8 indicates a premium versus the industry average of 1 while the price-to-sales ratio of 1.6 is above the industry average of 1.2.



Earnings per share ( EPS ) increased in the most recent quarter compared to the same quarter a year ago and are below the historical 10-year average. It has demonstrated a negative trend over the past 10 years while volatile as well. We include in the next graph the stock price because EPS often lead the stock price movement.





Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased when compared to its ROE from the same quarter one year prior. This is a signal of strength but still remains negative. Competitors such as Teck Resources Limited ( TCK ) trade for 8 times forward earnings and 0.9 times book as well as have a positive ROE. But for those seeking for a great ROE, the option should be US Ecology Inc. ( ECOL ).



Final Comment



Horsehead's revenue growth has slightly outpaced the industry average and despite having found a major weakness in the result of ROE, it has improved.



Hotchkis & Wiley Capital Management LLC has also been active in the company. The fund´s objective is to find undervalued companies that have a significant potential for appreciation.



I would recommend staying away from Horsehead at the time, mainly on account of its high valuation, volatile earnings and somewhat uncertain commodity prices. Instead, I would recommend investors to consider Dynamic Materials ( BOOM ) for your long-term portfolios if you are seeking exposure to the metal processing industry.





Disclosure: Damian Illia holds no position in any stocks mentioned.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: BOOM , ECOL , EPS , TCK , ZINC

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