Minerals Technologies Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Minerals Technologies Inc. is a global resource and technology company that develops, produces and markets a wide range of specialty minerals, mineral based, and synthetic mineral products, and it offers systems and technologies with related services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Minerals Technologies (MTX) is a company that operates in a rather niche field. It’s not as well-known as other Fortune 500 companies, but understanding its business requires delving into its specific operations and the intricacies of their specialty product markets.

Business Explanation:

MTX operates in two segments:

  • Performance Materials: This segment represents the largest share of their business and offers a wide range of engineered minerals that they manufacture from mined raw resources. This segment includes specialty minerals that are sold across a multitude of industries such as packaging, paper, food and beverage, construction, electronics and automotive. This segment accounts for roughly 60% of total revenue.
  • Specialty Minerals & Engineered Systems: The Engineered Solutions segment includes systems, technical support, services, equipment and technology used in their customers’ manufacturing and production process. This segment includes a diverse customer base.

The industries MTX operates in are cyclical, with the paper industry especially facing declining demand which decreases sales for their Performance Material segment. This segment is also subject to fluctuations in industrial output, commodity prices, and the economic conditions of their customers. The Engineered Solutions segment is less cyclical, since its recurring revenues are generally less dependent on the market and its customers’ capital investments in new production facilities. Despite the cyclicality of the Performance Material segment, MTX benefits from strong relationships with a diversified customer base.

MTX’s reliance on a mix of cyclical and counter-cyclical businesses may be an attempt to balance out swings in economic conditions and maintain steadier revenue streams.

The competitive landscape is intense, particularly in Performance Materials which is heavily fragmented, but the Engineered Solution segment benefits from high switching costs. Competition includes large multi-national producers and smaller regional companies. They compete on price, product quality, technological capabilities, customer relationships, and reliability of supply. MTX’s primary source of competitive advantage lies in their ability to process and utilize unique specialty minerals and technology which enable them to create products with unique characteristics and performance qualities.

MTX’s focus on providing specialty mineral products and unique production processes helps to build a degree of customer stickiness, as switching suppliers is not a trivial task for their client companies.

Financial Analysis:

  • Revenue Distribution: MTX derives its revenue primarily from its Performance Materials segment, followed by Engineered Solutions. As mentioned earlier, revenue from Europe, Middle East and Africa accounts for more than 40% of total revenues for the three segments combined.

It is important to note that even though revenues might be spread out geographically and across different industry segments, their margins can vary widely between each division. For instance, in Q3 2022, their Refractories division had an EBITA margin of only 12.8% compared to the Minerals segment with a margin of 18.1% and the Specialty segment with a margin of 20.4%.

  • Margins: Despite the varied mix of their portfolio with volatile markets, their overall gross margins and EBITDA margins are fairly consistent. They have been able to pass on a portion of their increased costs to customers to maintain these margins.

They also mentioned in their most recent earnings call, that the company’s adjusted operating margins were 15%, despite an inflationary environment.

  • Recent Financial Performance: A look at the latest 10-Q reports reveals a mixed picture. In the three months ending in September 2023, compared to October 2022, while sales increased by 10.4%, the cost of sales, as well as selling expenses and other operating expenses, rose disproportionally. The net income of 25.2 million was up from 11.1 million in the year before. However, these numbers should be looked at with a grain of salt since it is just for one quarter. Furthermore, in the nine month period ending on Oct 1, 2023, compared to Oct 2, 2022, net income dropped by nearly 43%, from 126.5 million down to 72.7 million. For the longer term investor, it’s more important to look at consistent profits rather than these short-term swings.

A more in depth look at the income statement reveals that a large increase in SG&A (selling, general, and administrative expenses) and other operating expenses is also to blame for the lower net income compared to the same timeframe in the previous year.

  • Balance Sheet: Their balance sheet is also pretty healthy. They have a strong current ratio that is slightly above 2, which means they are liquid and can easily pay off their liabilities. Their debt to equity ratio is also quite low at .37, and their interest coverage ratio is very high. So their liabilities are fairly under control. They also have a fairly substantial amount of goodwill on the balance sheet, which they have noted they will test at least annually.

It is important to mention that their interest expense is quite low at $7.5 and 11.8 million for the most recent 3 month and 9 month periods compared to their operating expenses of ~$600 million and $1600 million, respectively, for the same periods. Their low interest expenses help the bottom line considerably.

  • Free Cash Flow: The company’s free cash flow over the last few years is fairly consistent, they also have ample cash equivalents on their balance sheet.

Strong cash flow is important for MTX’s continued research and development as well as for continuing their dividend payouts. In this regard, MTX has been increasing its dividend per share for 29 consecutive years.

Moat Analysis:

Rating: 2/5

  • Limited Moat: While MTX has some competitive advantages, it doesn’t possess a wide and durable economic moat. The company’s “moat” is largely centered around its access to specific specialty materials, technological capabilities within specific applications, and the high switching costs faced by its customers. The switching costs aspect is more pronounced in its Engineered Solutions segment, as customers that rely on their offerings are closely integrated into their systems.
  • Intangible Assets & Switching Costs: MTX has built relationships and know how over time which could be argued as an intangible asset. However, most of its advantage comes from its mineral reserves, and how it uses it in its specific applications, which are also a source of switching costs to customers who have come to rely on their solutions.
  • Lack of Pricing Power: MTX operates within a very competitive landscape and lacks strong brand recognition which limits its pricing power. This was emphasized by management in their most recent earnings call where they have faced difficulty in passing off all of their increasing costs onto the customers.
  • Vulnerable to Changes in Raw Materials Prices: As mentioned previously, the prices of raw materials could influence the company’s bottom line, which would reduce the value of their moat as it will reduce the overall profit margin.
  • Vulnerable to New Technology: Because MTX is not a pure play software/technology company that have near-infinite scalability, it is vulnerable to changing technology in its respective industries, where the competition can develop superior alternatives.
  • Limited Geographic Scope: Though MTX has global operations, a good portion of their revenues comes from Europe and North America. It is not particularly strong in the fast growing markets.

While MTX has some advantages, competitors with more financial resources and superior R&D departments could take away market share in the long-run. The competitive advantage, or moat, while present is not particularly durable or wide in any particular area.

Risks to the Moat:

  • Commodity Pricing Risk: As a resource company, MTX is vulnerable to fluctuations in commodity prices. As costs for its inputs go up, this could lead to reduced margins if those costs cannot be passed on to customers.
  • Technological Innovation: While MTX benefits from its proprietary technologies, those technologies may become irrelevant due to the pace of innovation in the various industries that they serve, particularly in the semiconductor industry.

Management discussed in the latest earnings call how increased R&D spending will help to protect their proprietary processes as well as develop new technologies to help with customer growth.

  • Dependence on Certain Industries: Because a significant part of their business is in paper production, the decline of paper usage reduces the value of MTX’s business within the Performance Materials segment. This requires strategic diversification into other areas which may not be successful.
  • Macroeconomic Conditions: As a cyclical company, economic conditions can heavily influence the operations of MTX, especially with a majority of revenues coming from the Performance Materials segment.

Business Resilience:

  • Diversified Customer Base: While it has exposure to some vulnerable industries, it does have diversified customers across different regions and industries which helps in reducing vulnerability. The diversification means they are not overly reliant on the sales performance of a few industries or customers.
  • Global Presence: The global operations of the company in Europe and North America gives it a strong base of customers that are mature and have been tested over the years.
  • Recurring Revenue: A portion of MTX’s revenue comes from recurring contracts and licensing fees. This reduces reliance on new sales and can help the company through periods of lower industrial demand.
  • Strong Cashflows: A consistent generation of positive cash flows also helps in its resilience, giving it a strong financial base which is crucial in navigating volatile markets.

Understandability:

Rating: 3/5 Although not complex, this is not the easiest business to understand. It requires delving into the operations of the chemical and raw resources industry, understanding the specific end-markets for its products, and understanding the specific processes that give the company a competitive advantage. For someone new to this industry, or someone with a background only in the technology sector or services, could find the business difficult to understand initially, but over time, after some effort, could get a grasp of the company.

Balance Sheet Health:

Rating: 4/5 MTX’s balance sheet is fairly strong. Although the debt to equity ratio has increased from the prior year, overall it is still very low. It also benefits from a strong current ratio, demonstrating its ability to easily cover its short-term liabilities with readily accessible assets.

  • Debt: Their long term debt is not large, while they have a significant amount of cash equivalents.
  • Current Ratio: Has remained strong year over year, at around 2 which indicates a high degree of liquidity to pay off its liabilities.
  • Goodwill: There is quite a lot of goodwill in the balance sheet. However, so far, they are not worried about an impairment.

Recent Concerns and Management Commentary:

  • Inflation: The company, like many other manufacturers, is facing inflationary pressures. Raw materials, labor, and transportation costs are all rising. However, management is focused on taking measures to offset these and maintain margins.

Management noted that their selling prices also rose to compensate for their rising costs, however this is likely to be short term, until competitors start undercutting their prices.

  • Economic Slowdown: Due to rising interests rates, many of their clients might pull back on investments in new projects which will lead to reduced demand. However, management said that they are still optimistic about growing revenues because of new product launches and increased demand in some sectors.

The company mentioned that while they are not recession-proof, they have had consistent demand through several economic cycles which makes them confident that they can navigate any future economic downturns.

  • Supply Chains: Although the company faces challenges related to the supply chain, it does not see this as a major long-term obstacle and the management says they have worked to secure their supplies to reduce disruptions.
  • Accounting Adjustments: Recent accounting adjustments that have been related to the adoption of new standards and reclassifications have been made, but nothing that negatively impacts their business prospects were noted.

Based on the information provided and the above analysis, an overall moat rating of 2/5 is justified given the company’s fairly limited competitive advantages, that are still threatened by industry factors. The business is somewhat complex and the balance sheet is healthy. While management is working to mitigate risks, it remains vulnerable to industry cycles, and external economic shocks, as well as new technologies. For all of these reasons, an understandability rating of 3/5 and a balance sheet health rating of 4/5 seem appropriate.