Down and Dirty on CRR (Process of Search and Quick “Valuation”)


Prior post on Carbo Ceramics (CRR)

CRR 10Q Sept 30 2014

My process is to weed out companies to look at based on their financial characteristics. In an ideal world, you would not be able to tell what the market price of the shares are trading at when you scan the Value-Line for the company’s financial history.

It is irrelevant where the price has been–either vastly higher or lower–just what your sense of the value is based on the FINANCIAL characteristics of the business.  I am not implying that my way should be YOUR way. Find what works for you in your search/valuation process.

My “Down and Dirty” on CRR Down and Dirty on CRR on November 14


An OK business with a clean balance sheet and incentivized management (14.5% ownership) and no dilution in a highly cyclical business. Not a franchise but an asset based business which means no value for growth.

I have rock bottom tangible book value of $32—a probable ugly case scenario if oil keeps falling to ?? Who knows.

Then I have reproduction value of about $43 per share which coincides with the lowest 1.3 times book value the stock has traded over the past 15 years. $45.

Industry multiples of EV/EBITDA (8.6 xs) place the value at $60 to $65

Median to high price-to-book value is $80 to $170.   Throw out the past high price. So……………..

Hard rock is $32 TBV;  Replacement or reproduction value $43-45;  Industry multiples $60 to $65; Cash flow multiple 12 to 13 times = $55 to $65.

Median price to book value past 15 years is $82, round down to $80   

$32 on the extreme low side to $80.   

So before looking at annual report or competitors to refine my numbers, I have an idea that this business might be worth buying at or under replacement value of $45. A plan for me based on my psychology and obtaining a price under replacement value might be to allocate a percentage of capital to buy this company starting at $45 down to $30. Perhaps three scaled buy orders on descending price?  Will I have the guts to keep buying to my allocation when and if oil goes to $60 and the S&P is down 600 points in a day? Yes, place GTC orders after final work is done.

Head in sand

Worth going through the proxy and 10-K for any problems.

Time: 15 minutes.


CARBO CERAMICS INC: A short thesis back when CRR traded above $150.


13 responses to “Down and Dirty on CRR (Process of Search and Quick “Valuation”)

  1. John,
    Great analysis process. How did you come up $23 million as excess cash ?

  2. The company had 37 million in cash as of 30/Sept. 2014. Typically folks just subtract the cash, but I wanted to leave 40% for immediate needs. Also $23 is easy to subtract on a per share basis ($23 mil cash/23 outstanding shares). But since cash is relatively low, the difference in valuation is minimal. I just have little, quick rules of thumb to speed up my analysis. The key is to distinguish between franchise/non-franchise thus a asset based company. Growth has no/little value. For past investors to be paying $150 per share meant they were extrapalating PROFITABLE growth in a commodity/service business. At the very least you avoid being in the “death zone” or owning a commodity based business far above its asset value–the realm of speculation or selling to the greater fool.

    I disagree on “great” analysis. Just a quick analysis for screening. I added in a report on shorting CRR in the post.

  3. John – great post and insights on quick and dirty analysis.

    Can you elaborate on “Not a franchise but an asset based business which means no value for growth.”

    • OK, I think I will need to post on this question because of the detail needed. Give me a day or so.
      In a nutshell, a franchise means that you can charge more than your cost of capital without competitors entering or competing against you.

      Therefore as you grow in the same line of business with a competitive advantage, you continue to earn your spread. The classic case was Wal-Mart from 1976 to ??? able to grow contiguously from the South Central US very profitably with each store.

      Without a franchise you can only expect to earn a fair return on the assets employed in the business (assets including SG&A) etc.

      Read: Competition Demystified.

  4. Thanks for sharing this process. Really interesting. I have a few questions.

    1) How long would the process take to actually initiate a position? Do you have a certain level of DD you perform to get to that point?

    2) Would you sharpen the valuation at all or would you just use the range that you have assuming no hidden liabilities/assets? Would the remainder of the analysis focus on the qualitative?

    3) Why 3x to find the capitalized value of SG&A? (bottom of pg 3) Is that what Greenwald uses in “Value Investing” and just used as a rule of thumb?


  5. After I do my down and dirty and I have determined a rough range of valuation I then go to the 10-K and proxy. Proxy for compensation and insider dealings. If that checks out then 10-K for hidden assets or any clue as to customer captivity with their software/services. Unfortunately, no break-out.
    I read that customers can get the low-cast alternative, sand, so I am even more inclined to say they have no competitive advantage. They do offer the “premium” product value proposition and their results have been amazingly steady even in 2008/09, albeit down.

    But the return for the marginal research effort drops off quickly. If I spent five days, would I become enough of expert to say at a certain price of oil/gas then customers will switch to CRR’s product? No.

    So I will use the emotion/disgust of other investors and trend followers to buy between replacement value and tangible book value since I believe that is below the private market value of the firm. So I have my limit orders in ……….I may never get the chance to buy.

    Greenwald uses 1 to 3 times SG&A. Since this has been in operation almost two decades with multiple plants, software service and over 1,000 employees, I went with 3 years to estimate a competitor’s cost to enter–probably on the low side on my part.

  6. Thank you for sharing your analysis.

    Agreed that given the facts we have now $32 for tangible book value is a conservative value.

    However, suppose CRR is forced to change their business completely because the market no longer wants ceramic proppants (i.e., the ‘premium’ product). How to go about giving proper credit for existing asset value and reproduction value given that their focus thus far was on ceramics and would now have to shift to sand?

    Also, I too look forward to the franchise vs. asset based business post.

    Thanks again!

  7. You would have to determine the cost of retooling their plants that make proppants. But you are assumning that a product that has and is being used would have no value. That is a pretty big leap. Probably there would be losses that would eat into tangible book value. You could assess some probability like10% and deduct from tangible book. But right sizing the position (no more than 3%) bought in tranches over time should mitigate some of that risk. As scary as it is to buy a falling price–what do the sellers know that the buyers don’t? Obviously, the market knows about China competition, sand as a cheap (but less productive) alternative. What CRR is selling is not Proppant but a cost-effective, efficient and most productive method to extract oil and gas through fracking.

    I have my first order in $44.07 GTC

  8. Hi – you noted that this company is not a franchise. I don’t know if this is too basic but just from looking at the one-pager information at the VL – how can/do you quickly come to that conclusion?
    Is it because of the volalitiy (and declining trends in recent years) of the ROIC/ ROE ratios ? I would have thought at low double digit (in its most recent year) it is not great, but still reasonably respectable?
    To be fair, the CF/ Sh did increase from 1 to almost 5 dollars from 1998 – 2013 whereas, Capex/ Sh has been consistently lower than CF/ Sh for most of the years at the same period.
    Your enlightenment is much appreciated. Thanks in advance

    • Sure, double digit return on assets 15% is good and the consistency is also good. However, a higher ROA above 20% is probably needed to begin to say this is a franchise. Probably less than 5% of all companies are francihises–can grow profitably within their niche for long periods of time.

      Maint. capex will certainly be lower over time since they have recently build capacity. So you get about $4.50 to $5.50 of free cash flow with no growth. What would you pay for that?

  9. Time to buy a partial position in CRR at $36.50 on Dec. 1, 2014, Yes the news is awful. Crude oil to $40. Drilling activities to collapse.

    The best time to buy is when the bad news no longer makes the price go down.

  10. Hi. What about current state of affairs with Carbo? What do you think?

    • It is not important my opinion–you gotta do your own work.

      The company has no competitive advantage in a very competitive, easy entry market. Unless you know the industry has been starved of capital (future supply) there may be better opportunities elsewhere. A Pass IMHO.

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