Pat McKeough recently replied to an Inner Circlemember looking for an opinion on this maker of fibreglass tanks. ZCL’s sales may be up, but currency rates have tamped down on its earnings.
Q: Hi Pat: Please, may I have your thoughts on ZCL Composites. Thank you.
A: ZCL COMPOSITES INC. (symbol ZCL on Toronto; www.zcl.com) makes fibreglass storage tanks and related liners, mainly for the oil and gas industry. It markets those corrosion-resistant products under the ZCL, Xerxes, and Parabeam trademarks. ZCL operates two plants in Canada, four in the U.S. and one in the Netherlands.
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The company sells to both the retail (downstream) and production (upstream) sectors of the Canadian and U.S. petroleum industry. It has about 90% of the Canadian market for underground storage tanks. The company also sells underground tanks for storing wastewater.
Revenue rose 34.1%, from $127.0 million in 2011 to $170.4 million in 2012. It then fell to $161.7 million in 2013 on lower demand for aboveground tanks. The company’s revenue improved to $170.8 million in 2014 and reached $185.7 million in 2015.
Earnings jumped from $0.12 a share (or a total of $3.5 million) in 2011 to $0.54 a share (or $16.3 million) in 2014. Due to a writedown of its aboveground tank division, earnings fell to $0.43 a share (or $13.0 million) in 2015.
ZCL recently announced the closure of its aboveground tank operations due to slowing sales and poor earnings.
In the three months ended September 30, 2016, revenue from the company’s continuing operations rose 4.0%, to a record $57.9 million from $55.6 million a year earlier. Earnings fell to $0.25 a share (or a total of $7.7 million) from $0.26 a share (or $7.9 million). Excluding currency movements, earnings were $300,000 higher in the latest quarter.
ZCL ended the quarter with cash of $38.1 million, or $1.24 a share. It has no long-term debt.
The company pays quarterly dividends of $0.08 a share; the annual rate of $0.32 yields 2.6%. ZCL also paid a special dividend of $0.50 a share in March 2016.
The company will continue to benefit as environmental pressures prompt the North American oil-and-gas industry to replace and upgrade aging steel storage systems with fibreglass models. ZCL cites a study that estimates about 15% to 20% of the retail fuel tanks in service today are more than 30 years old; about 50% to 60% are 20 or more years old. The company is also poised to sell more tanks to larger fuel retailers in the U.S. Those operators continue to build an increasing number of retail fueling sites as they compete for market share.
However, ZCL stock is an inactive trader. That can expand its volatility, especially when the overall market is unsettled.
Inner Circle recommendation: ZCL Composites Inc. is okay to hold for aggressive investors.
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