Monarch Cement: The Best Stock You've Never Heard Of?

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I sometimes get a little unreasonably excited whenever I find a stock analysts don’t cover.

There’s definitely a hidden treasure aspect to it — and who doesn’t like treasure? — but that’s not the big reason.

The beautiful part of finding a growing under-the-radar stock is the upside potential you get from other investors discovering it. Get just a few influential investors excited and that can really juice returns.

Why do you think so many microcap investors on Twitter relentlessly pump their holdings?

There’s also a weird sort of pride to the whole exercise. You get credit for discovering the next winner, sure, but it’s more than that. Guys who discover some hidden gem of a stock years before it becomes mainstream become a sort of legend, whispered about behind their backs by attractive ladies (or fellas, if that’s what you’re into).

Okay, maybe not. But it is fun to get on the ground floor on something.

My problem with this is I rarely discover the next high flyer. It’s not for lack of trying either, but because such a thing doesn’t mesh very well with my investment style. I’m looking for stodgy, boring companies that pay consistently rising dividends. Those companies might make me money in the long-term, but they don’t offer the kind of meteoric rise that make an analyst a legend.

At least not very often, anyway.

Oh well. Let’s take a closer look at one of these boring stocks, Monarch Cement (OTC:MCEM), a quietly boring stock which has delivered pretty exciting long-term returns. But, I should warn y’all: there are some warts here too.

The skinny

Monarch Cement was founded on Coal Creek, directly south of Humboldt Kansas, back in 1908. It was the third cement company in the state at the time of its founding. It officially opened for business in 1909 with a capacity of 5,000 barrels of cement daily. It also featured the largest crushing plant in Kansas.

The company struggled for its first few years before H.F.G. Wulf is appointed receiver in 1915. He transforms the plant into a thriving business, and the company declares its first 6% dividend to shareholders in 1922.

Monarch expanded throughout Kansas in the 1950s, 60s, and 70s, eventually acquiring several concrete concrete companies, giving it a captive market for its products. It expands into Iowa in 1979 by buying a cement plant in Des Moines. It eventually expands into other states like Missouri, Nebraska, Arkansas and Oklahoma, either directly or via assets in Kansas that are close to state borders.

Put it all together, and Monarch owns a large cement plant in Humboldt Kansas, which sits on 5,000 acres and can produce approximately 1M tons of cement each year. The Humboldt plant has enough raw materials on site to facilitate production for another 50 years. It also owns a cement terminal in Des Moines, which sits on some 250 acres worth of land. It then owns various companies that sell the ready-mixed concrete to local customers, mostly in Kansas but also in neighboring states.

At its heart, Monarch is a family company. Two families control the board and combine to have a large position in the stock.

More than a century after H.F.G Wulf first turned the company around, the family is still involved. His son Walter H. Wulf Sr. was elected president of the company in 1945 and his son eventually became the third Wulf to hold the presidency in 1997. He continues as Monarch’s CEO and Chairman today. And Walter Wulf III serves on Monarch’s board of directors.

Wulf is also a large shareholder of the company, owning 6.62% of capital shares and 17.32% of the Class B shares. We’ll talk more about the multiple-voting share structure a little later, but overall I’m comfortable having someone with a substantial ownership position running the place, plus his approximately one million years of experience is helpful too.

The Radcliff family is also involved, with directors Bryon and Robert (who are direct decedents of Bryon Sr., who served on Monarch’s board for 50+ years) representing the family on the board. Together, the family owns about 8% of the capital shares and 19% of the Class B shares.

The cement business is a capital intensive one, and Monarch has a pretty substantial advantage from using assets that, in some cases, were built more than a century ago. It also enjoys local moats, since cement is heavy and expensive to ship over long distances. The company has also benefitted from economies of scale as it produces more and more from its Humboldt plant, which has improved gross margins over the years.

Gross margins improved from 21% in 2014 to 35% in 2023, however we’ll note that gross margins were just under 29% in its most recent quarter. The good news is that number is higher than comparable results in 2023. The cement business is also slower in the winter, so that would also impact margins.

Revenue growth has also been solid, with Monarch growing the top line from $147M in 2014 to $263M in 2023, or about 6% per year. Sales in Monarch’s latest quarter increased from $46.4M to $50.1M on a year-over-year basis, or about 8%.

Earnings have marched nicely upwards and to the right for the better part of a decade. Monarch earned $2.86 per share in 2014; by 2023 it earned $19.92 per share. And after yet another strong quarter earnings over the last twelve months checked in at $22.32 per share.

The stock, meanwhile, trades at approximately $199 per share. That gives us a price-to-earnings ratio of just under 9x with the strong possibility of additional long-term growth. Sure, cement is cyclical, but Monarch doesn’t just sell to the real estate industry. It also sells to governments and larger contractors, projects that aren’t so tied to the economic cycle. It’s easy to convince yourself that the company would weather the next downturn pretty well.

Monarch also has a pristine balance sheet with some $40M in cash, zero debt, and private investments that are worth a hair over $83M, or about 20% of total assets.

In short, this is a business with an obvious moat, with a history of increasing earnings, that is controlled by two ultra-long term shareholders, with a debt-free balance sheet, and which pays a dividend that slowly gets higher each year. Put that all together, and it’s a nice combination. 

Before we get too excited, however, let’s take a closer look at a couple of the wrinkles that might impact a potential investment in this company.

The issues

Let’s start with the dual-voting share structure, which alone is enough to scare certain investors away.

Monarch is divided into capital shares (those are freely traded) and Class B shares, which come with a number of restrictions. Class B shares can only be held by certain family members and offer 10 votes for each share held. Capital shares have a more standard 1 vote for 1 share policy.

As of the end of the last quarter there were a hair over 2.5M capital stock shares outstanding and 1.1M Class B shares outstanding, for a total of 3.67M shares. Capital stock and class B shares are economically identical, the difference is the voting rights and ownership restrictions.

The interesting wrinkle to this concept is what happens when Class B shareholders want to liquidate. They can either sell to another member of the Wulf or Radcliff families, or they can convert their Class B shares into capital stock shares and sell them freely.

This conversion is simple; they convert on a 1-to-1 basis.

Family members are doing that, and the company is buying up those shares (and more) as they come available.

The largest shareholders aren’t selling; they seem content to live on their dividends or, in Wulf’s case, his salary as CEO and Chairman. Therefore, their ownership position is slowly improving over time. For instance, Wulf Jr. owns 17.3% of outstanding class B shares today. At the end of 2020 he owned just under 16% of shares outstanding.

It’s the same thing for Paula Radcliff, the other large shareholder, who owned 17.7% of all Class B shares outstanding in 2020. By the end of 2023, she saw her ownership stake increase to 18.8% of Class B shares.

I’ve seen a lot of family-controlled small companies in my day, and many of them are ran for the benefit of insiders at the expense of other shareholders. Monarch has done a nice job of striking a balance between making sure the family(ies) have control but also making sure they don’t screw over minority shareholders in the meantime. And, as mentioned, I like the idea of these families being involved.

Also, Wulf signs off every annual report with this little note, suggesting that either he or other members of the family are interested in buying shares, not selling them.

The other wrinkle is the investment portfolio, which consists of two parts: investments in unaffiliated companies and investments in affiliates.

The unaffiliated portfolio is worth $68M, and it consists of:

The holdings of the portfolio aren’t disclosed, but it looks like the capital is invested in various stocks that are at least adjacent to Monarch’s business.

It also has a 36% ownership stake in GFI, which produces bricks. This investment is worth approximately $16M.

The issue with these investments are two-fold:

1. Disclosure isn’t great

2. They’re delivering one-time bumps to earnings which could be mistaken for better operating results

Let’s focus most of our attention to the second point, since there ain’t much we can do about the first. In Q1, 2024, Monarch earned $16.6M in profits, or $4.53 per share. That compared quite nicely to profits from the same period last year, which were $7.9M or $2.14 per share.

But upon closer inspection we see this year’s profits included a $10.8M unrealized gain on equity investments:

To be clear, there’s nothing shady going on here. Monarch is doing exactly what they’re supposed to do. But these equity investments are impacting the bottom line, and investors should know about them.

Still, I’ll point out that results that just include the cement business are solid. In 2023, Monarch earned $73.7M in profits. If we strip out the $16.1M in made in unrealized equity gains, the company earned $57.6M in profits — or $15.57 per share.

That puts the stock at approximately 12.8x trailing earnings, which is reasonable. Here are the trailing P/E ratios for some of Monarch’s publicly-traded peers:

• CRH (NYSE:CRH): 17.3x

• Vulcan Materials (NYSE:VMC): 36.7x

• James Hardie Industries (ASX:JHX): 29.2x

• CEMEX (NYSE:CX): 12.6x

We’ll note that all these companies have levered balance sheets — especially CEMEX, which skews the comparison just a little. Remember, Monarch has a pristine balance sheet with some $40M in cash and no debt. Its peers cannot boast anywhere close to that kind of balance sheet strength.

Dividends and buybacks

That last section went a little longer than planned, so we’ll zip through this part.

Let’s start with share buybacks. Monarch is repurchasing shares, as mentioned, and has decreased the number of shares outstanding from 3.9M in 2020 to 3.7M today. Not bad.

The company’s dividend growth is even more impressive. It has consistently hiked its dividend for at least 10 consecutive years. The payout went from $0.92 per share annually in 2014 to $2.65 per share in 2023. The current quarterly dividend is $0.75 per share, meaning investors should expect $3 per share in dividends in 2024.

That works out to an increase of approximately 11% annually over the last decade.

And with a payout ratio well under 50% of earnings — even after stripping out investment gains to come up with a more realistic earnings number — the dividend should be safe for years to come. Even if the economy tanks and the company has a couple of bad years.

Dividend security: High
Dividend growth potential: 8%+

The bottom line

I like Monarch, even if it does have some warts.

The long-term family ownership is a huge plus, even if it comes in the form of multiple-voting shares.

I think it’s extremely unlikely any competitor shows up and builds a cement plant anywhere close by. It might be a 1970s-esque moat, but that’s still a moat. Acquiring various cement companies close-by also helps keep the plant operating at high output levels.

The pristine balance sheet and large cash balance are also a pretty nice thing to have. And I’m a big fan of both the dividend growth and the share buyback.

The only issue is the price. Monarch is currently trading for an all-time high. Sure, the valuation is still decent, but we must still remember that cement is a cyclical business.

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