Georgia Gulf Corp GGC

GGC

The bull case:

1. 20+ year old major North American producer of commodity chemicals and polymers for doors, windows, exterior molding, PVC pipes etc. Highly associated with residential and commercial construction and the growing renovation/remodelling industry-- particularly in Canada. This is a classic case of a very CYCLIC company. The production of PVC pipes is less linked to the business cycle and more associated with infrastructure.
2. Share price knocked down by 50% from 52 week highs of $24 (now $11.74)
3. Valuation ratios favourable v.s. peers: trailing P/E 5 (Q2), P/B 0.97 P/S 0.14 compared to 18, 3.3 and 1.5, respectively for peers.
4. excellent free cash flow P/FCF of approx 5. $100 M past 12 months. Capital ex approx 3% of sales (low by industry standards)
5. 2.9% dividend yield. Payout ratio N/A
6. decent operating margin— 5 year average exceeding 6%. Five-year average ROE is over 23%. Recent acquisition of Royal Group improves margins and market share in Canada, where housing starts/renos have been much more stable than on the USA coastal metropolitan areas.
7. has sold two Canadian plants for $5 M, used to pay down short and long term debt while consolidating into existing Canadian plants to maintain "scalability".
8. Debt is favourably financed-major repayments do not start until 2012.
9. some insider buying starting in August at $17.25/share.
10. Charles Brandes, a well respected value investing guru, added to his position in GGC for $17.30/share to make up a total holding exceeding 2 M shares in June 2007.
11. As of Dec 2006 Morningstar's fair value estimate is $34/share.
12. very low EV/EBITDA ratio of 0.66 and P/B ratio of .96 make the company an attractive take over target, hopefully with a premium for the shareholder (remember that this does not always happen!).