Materion
Materion Corporation (MTRN) produces high-tech metals for industry. It also has a near monopoly position in one minor metal, Beryllium (symbol Be). I believe the company has off-book assets and intellectual property that make it an undervalued situation.
MTRN was founded in the ‘30s based on the work in the ‘20s at Brush Laboratories. This involved the element Be. Be is an extremely light and strong metal, but is quite difficult to produce and to alloy with other metals. MTRN mines its Be from a unique deposit at Spor Mountain, Utah that produces about 75% of the world’s Be. In fact, the major competitor to MTRN, ULBA in Kazakhstan, doesn’t do any mining. It sells off the remaining Soviet stockpile.
Be is used in two main ways. About 80% is alloyed with copper to produce a metal that is stronger than some steels, formable, nonmagnetic and has much greater electrical/thermal conductivity than other strong metals. It’s used in a wide variety of applications, from springs to oil drilling to electronics.
Be is also used in metal form for applications that need ultra-high performance, like aerospace and defense. The DoD was so concerned about the supply of Be that it built a plant in Ohio with MTRN to ensure supply. This is still running; about 70% of its output goes to DoD. To illustrate how high performance this is, it was banned from F1 racing to prevent the McLaren team from getting an overwhelming advantage.
Over the years, MTRN has extended its product line beyond Be. It now produces a wide line of clad metals, high performance alloys, and metallic chemicals. Many of these products only have niche markets, but are superior or irreplaceable in what they do.
The end markets for MTRN’s products, as you would expect, are mostly high-tech industries.
Consumer Electronics
28%
Industrial Components
15%
Medical
11%
Defence
9%
Automotive Electronics
8%
Other
11%
Source: Company Filings
Most of these end markets are growing at above overall economy rates.
INVESTMENT THESIS
MTRN is estimated to earn $2 / share in 2018. This gives a PE of about 25. That is high, although somewhat mitigated by being in growth segments of the economy. But the case for MTRN is really in its assets. In particular, the Be segment could only be duplicated at extremely high cost. In fact, other companies that also produce Be-containing products buy their raw material from MNTR.
MTRN’s other segments do not have that underlying market power. But they are all technology intensive. One has to think that it would take a large investment in intellectual capital and in working up the learning curve to duplicate MNTR’s operations.
One issue with MTRN is that their bulk Be business has large customers who actually compete with MTRN in the end products. So this gets into the situation of monopoly vs. monopsony. The resulting negotiations can lead to protracted fights. This happened a couple of years ago, and MTRN’s sales suffered. For now, this seems to be settled.
MNTR recently completed acquisition of Heraeus Precious Metals. This company may be familiar to those SA readers who invest in precious metals. It’s main asset is its facilities and expertise in precious metal technology, particularly platinum-group metals. This is a natural fit with MTRN, where it will now compete with Johnson-Matthey (JPMLY).
MTRN aims to grow EPS in the low double digits. In view of the strengths it could monetize, I think this is doable. However, there are a lot of pricing issues that will have to be worked through. My guess is that the market will only recognize this growth as it happens.
MTRN is financially very strong. It has virtually no debt; most of its liabilities involve the running of the business, such as accounts payable, accruals and pension contributions. Would it be possible for an outsider to take control and lever it up? I think so, as ownership is diffuse. However, I am not basing the case on this possibility.
