Vitreous Glass $VCI.V
A regional monopoly that spews cash flow
Note: I use Stratoshphere to help with my research, to follow my holdings, screen for ideas and get insights to company specific KPI’s that drive the business results. I also use it for charting in my content to visualize data. Get 25% off a great stock research platform, stratosphere.io
Vitreous Glass is traded on the TSX Venture under the ticker symbol VCI. It has a market cap of 30 million $CAD. It is fairly illiquid and not followed by many. I own some shares in my personal account.
I originally found this idea from a somewhat viral tweet where I asked people to tell me about small monopolies. Check it out for yourself as it might have some interesting ideas in the replies.
The Elevator Pitch
Vitreous Glass is a great regional monopoly with high predictable cash flows and a simple understandable business model. You will get returns with a growing stream of dividends based on the performance of the business. Management is incentivized to focus on steadily improving cash flows from the business and is aligned with shareholders. Currently trading at a fair price and unavailable to large investors and institutions due to small size.
Business Overview
Opened in 1995 and employing 10 people, Vitreous Glass Inc. accepts deposit system beverage container glass from Alberta, British Columbia, and Saskatchewan.
Vitreous removes the contaminates and crushes the glass to sand. This GlasSand™ is then sold to fibreglass insulation manufacturers as furnace ready cullet for use in their production facilities.
This is directly from their website. I don’t know that I need to write anything more. It’s one of the most simple businesses you can find.
Insiders and Management
Insiders own a large portion of the business. Patrick Cashion and his wife, Meredith own about 37% while other directors and managers own another 3-4%.
The incentives are mainly tied to operating cash flows with the biggest being 20% of cash flows going to Patrick Cashion, the founder and CEO. There’s also some stock incentives but not as significant compared to the cash flows.
Risks
The end market for insulation is exposed to the economic cycle of the building sector (homes, commercial, industrial). Today things in the region are doing well but it can certainly be ups and downs that will impact demand for the cullet.
Vitreous relies on a couple of suppliers and a few customers. The buyers is probably the larger risk as the supply is mainly from government contracts that should be quite reliable.
Capital Allocation and Returns
Reinvestment into the business is low. There have been capital improvements made to their facilities and equipment over the years and recently extra storage space which should improve reliable production with the ebbs and flows between supply and demand.
The truth is that you will likely see the vast majority of your returns with dividends. Each quarter the company decides how much to pay out. Normally they keep a safety cushion of cash and beyond that, all cash leftover from free cash flows are paid out as dividends. I believe this is a conservative approach and I really like the fact that they don’t simply keep the dividends the same amount every quarter as an investor relations tactic. They pay what they should. This is how a private business would operate but it isn’t what large cap dividend aristocrats investors are used to seeing.
The current quoted yield is over 6% but it’s best to look at a longer period as the numbers are volatile quarter to quarter for the payout. I would expect the real number to be somewhere between 7 and 10% if you consider the incremental growth going forward to be similar to the past. You are currently paying about 10x operating cash flows but historically you could get it cheaper. If you believe they will continue to grow over the next few years as the margins and revenue continue to improve like they have over the past few years then you will do quite well. The balance sheet is very conservative is very conservative so bankruptcy is not a real risk in my opinion. The real risk is you are paying potentially a high price at some economic peak. If the cycle reverts in the building sector then you could see some decline over the medium term and valuation will contract.
If you want another take on the business, here’s an older writeup I found that was written a few years ago:
VCI - Canadian Value Investors
Please feel free to share and reach out on twitter @mos_investing.