This materials company is way safer than it gets credit for
The consumer staples industry tends to be more stable during economic downturns. That means these companies tend to be a safe haven when it comes to both equity and credit investors.
Even still, the market doesn’t always price these companies like safe havens. The market is missing a good opportunity that lies ahead for the companies that provide various products or services to these stable, recession-proof companies.
Let’s look at one of the great examples of this, TriMas Corporation (TRS), using Uniform Accounting to evaluate if it could really be a good opportunity for credit investors.
We can use Uniform Accounting to put the company’s real profitability up against its obligations and decide for ourselves the true risk of this business.
Also below, a detailed Uniform Accounting tearsheet of the company.
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Credit investors usually favor companies with stable and strong performance, high recovery rates, and the ones that might not get significantly affected by a downturn.
There’s one industry that fits this description perfectly, which is consumer staples.
These companies are known to be recession-proof since they provide essential products to consumers.
However, many credit investors fail to realize that there could be opportunities outside of the consumer staples space that fit into this description of favored companies.
These ones would be the suppliers of products and services to the consumer staples companies, and one of the great examples of this is TriMas Corporation (TRS).
TriMas Corporation is a materials company that provides a diverse set of products primarily for the consumers, aerospace, and industrial markets through its packaging, aerospace, and specialty products segments.
As has been the case for consumer staples companies, TriMas also tends to do well during downturns.
For instance, the company recorded one of its highest return years in 2008, when the Great Recession hit the world.
Due to its stable and strong performance even during downturns, it might be a good opportunity for credit investors who want to take a little more risk and higher yields.
However, the perception of credit rating agencies on the company is totally different. S&P gave a “BB” rating to TriMas, which implies a 10% chance of default and defines it as high-yield.
Considering the company’s high recovery rate of above 100%, no significant debt maturities in the near future, and its strong performance during the downturns, this credit rating is too high for TriMas.
We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand the company’s obligations matched against its cash and cash flows.
In the chart below, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).
The CCFP chart shows that TriMas Corporation’s cash flows are much more than enough to cover its obligations going forward and the company does not have any significant near-term debt maturities.
The CCFP chart shows no risk at all for TriMas Corporation as its gross cash earnings are above its obligations for the next five years.
Also, the company will not deal with upcoming debt headwalls or refinancing problems in case of a downturn.
Taking into account all these factors, giving it a high yield that implies a 10% chance of default does not seem realistic for the company.
Instead, here at Valens, we think that this company deserves to be an investment-grade name.
That’s why we are giving an IG3+ rating to the company.
An IG3+ rating implies approximately a 1% chance of default which would be much more reasonable.
It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.
To see Credit Cash Flow Prime ratings for thousands of companies, click here to learn more about the various subscription options now available for the full Valens Database.
SUMMARY and TriMas Corporation Tearsheet
As the Uniform Accounting tearsheet for TriMas Corporation (TRS:USA) highlights, the Uniform P/E trades at 16.7x, which is below the global corporate average of 18.4x and its historical P/E of 17.0x.
Low P/Es require low EPS growth to sustain them. In the case of TriMas Corporation, the company has recently shown a 31% Uniform EPS shrinkage.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, TriMas Corporation’s Wall Street analyst-driven forecast is for a -9% and 7% EPS growth in 2022 and 2023, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify TriMas Corporation’s $26 stock price. These are often referred to as market embedded expectations.
Furthermore, the company’s earning power in 2021 was 2x the long-run corporate average. Moreover, cash flows and cash on hand are more than 3x its total obligations—including debt maturities and capex maintenance. The company also has an intrinsic credit risk that is 340bps above the risk-free rate.
Overall, this signals a moderate credit risk and a low dividend risk.
Lastly, TriMas Corporation’s Uniform earnings growth is below its peer averages and is trading in line with its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research