PFB Corp is a Calgary based company that is traded on the Toronto exchange. It is a small niche company that provides products and services in the residential and commercial building materials made of expanded polystyrene aka “EPS” (very boring stuff, to be sure)…. Basically, they make insulation from plastic with trapped air and design/install it for you if need be. They operate in Canada and the US and produce the stuff in North America. This little baby has a market cap of 110 Million bucks and an enterprise value that is a few million shy of that figure (meaning no net debt).

What do they do?

They produce and sell plastic insulation to customers and also provide other related services (design/installation, etc.). They seem to try to brand these aspects into the different end user customer base which is likely a smart idea although when you break it right down, they are selling insulation to builders/contractors/suppliers so, not a huge competitive advantage.

Do they make money?

Mostly, yes. In the last few years, business has been good. Steadily growing revenues and profits. Gross margins have improved up to 30% or so from a low of around 15% a few years earlier. It appears there is some inconsistency here with the margins that is likely due to the reliance on raw material (commodity) pricing being a key input and only being able to pass along some of the fluctuations in the cost to the customer. That being said, over the past decade, the business has become more profitable with positive returns on equity, assets and invested capital. Free cash flow has been positive the past three years but has been spotty in the past 20 years with some years requiring more capital investment. For instance, in 2017 and 2008, there were significant capital requirements that caused the cash flow to become negative.

Is there reinvestment opportunities?

Management appears to be keen on providing regular and special dividends in the last few years. I would have liked if they would have devoted more of that cash to buying back stock as a more efficient means of returning capital to shareholders but whatever, not a huge issue. They could potentially buy other companies in the space to build out there geographic focus and potentially get a stronger bargaining power and lower some of their administrative costs. Unfortunately, they currently don’t have a lot of cash to undertake such ventures and while the debt they do carry is not a huge burden, for a cyclical business, it would be nice to see more cash to deploy in a downturn as opposed to restraining business activities.

Is there risk of a blow-up?

In the near term it does not appear likely (shakes magic eight ball). With an Altman-z score above 5 (good) and no other glaring signs of distress, it seems unlikely. Anecdotally, the construction industry is primed for growth in North America for a little while anyway (until the next crash).

Is management sketchy?

Doesn’t appear so. From my brief investigation into the numbers and some of their investor presentations, it appears like a typical integrated niche business. The management team seems to desire continued growth but isn’t promising the moon. They have seemed focused on dividends and minor share buybacks in the past and have not diluted shareholders nor have they taken on massive debt to juice the returns. They lease and own some of their facilities which seems reasonable. They seem like regular old boring “folk”.

Is there a moat?

NO WAY, JOSE! Moving right along then….

Is it cheap?

Yessir. Price to sales is around 1X and historically this a little high. That being said, sales have been growing faster than they historically have so there could be some returns to be had here. Compared to the overall market, this stock is a potential bargain with a PE of around 8.5 and an EV/EBIT just over 5. It may not have huge growth but even with GDP type growth, it’ll be tough to beat this one without uber growth rates. You could get at least market returns with no growth assuming no disastrous business problems, and at best you could get a really nice 10 year return with even modest growth rates in the top and bottom lines. Margin of safety seems to be that this thing is predictable, boring, cheap and not over-levered.

Final Thoughts:

This one could be worth a second look as it is potentially cheap and growing. Would definitely want to scrutinize managements past actions versus their commitments and also try to think about how the cyclical nature of construction as well as the underlying commodity pricing may affect their fundamentals. Probably not something to put into your coffee can portfolio if you want something with a defensible moat or competitive advantage, as quite frankly, there ain’t one to be had here.