The Unknown 100X Stock, That Has The Most Resilient Business In The World

Built to endure: The case for holding this stock for 100 years

An “Old World” Company

While this stock is built to last, that doesn’t mean it lacks performance as it has gone from 65 cents a share in 1991 to 115$ a share as of writing. Resiliency is an ever greater exception in business as even among the largest most successful companies, they now rise and fall out of their dominant positions much faster than they used to. If you go back about 80 years, the average time a business entered and stayed in the S&P 500 has gone from over 60 years, down to about 15. People love the idea of buying a great company, and letting that investment grow forever, but it is the very rare business that has the attractive microeconomics, competitive advantages, and the apathetic rate of change to qualify.

One such business is U.S Lime and Minerals (USLM)

Business Model:

U.S Lime and Minerals owns limestone mines/quarries in Texas, Arkansas, and Oklahoma. They extract the limestone from these quarries and can sell crushed limestone itself or process limestone in facilities within a couple miles of the mines into 4 distinct limestone products. These products are essential to the production and service of many other businesses like

soil stabilization on a highway, making steel, the production of chemicals, the production of roof shingles, asphalt paving, making paper, water treatment, poultry feed, production of glass, limiting the emission of sulfur dioxide, making Portland cement, pharmaceuticals, agriculture, aggregates, and general construction material

United states Lime & Minerals is in both an enduring and favorable industry as limestone is expected to be a growing industry in terms of actual metric tons sold for at least the next decade and because limestone is used in so many different products and processes it is highly unlikely to have long drastic downturns. USLM in 2024 sold its products to 675 different customers and no single customer accounted for 10% or more of sales making the business’s sales resilient.

USLM gets their products to their customers through both truck and rail transportation all within at most 400 miles from each mine. That will become a very important point to go over in the competitive advantages of the business. USLM has established relationships with its customers but also seeks to increase their orders with them or establish new relationships through their incredibly expansive company sales team of eight people. These are some fantastic salespeople as the business produced 352 million in sales during the past year. Now that you have an idea of what the business fundamentally does, we can focus a little more on the uniquely favorable aspects of this company and industry.

The Moat and Microeconomics of USLM:

While USLM extracts and makes what are essentially commodities, their returns are not commodity like. You can’t understand their profitability/microeconomics without understanding their competitive advantages.

The first major one, is the laws of physics. It takes energy and it costs money to move heavy things like heavy limestone products. The cost of moving certain limestone products can be multiple times higher than the cost of the actual products. This means a mine is almost always the lowest cost producer for some good distance, giving them strong pricing power

The second moat source is that while limestone itself isn’t rare

large accessible limestone deposits are a little more rare

the deposits having good markets near is a little more rare

then being able to get the permit is a little more rare

and especially it being high “quality” limestone is incredibly more rare

If it’s not high quality then many of the use cases stated earlier don’t work.

It’s important to know there are very big differences in the costs of transporting crushed limestone versus the processed products, as well as very big differences in moving cost among the more processed products. For example, their crushed limestone can double in price for the customer if the construction site or delivery location is only 50 miles away. For their lime slurry (not to be confused with slushy) transporting it 200 miles would double the cost. However, for their hydrated lime product you could transport it 100 miles away and only increase the cost by 10% or less. I did some very back of the hand math using industry estimates for the prices of the various products USLM sells, industry estimates for the costs of transporting them, and industry estimates for the portion of sales that each product is responsible for, so it is way less than ideal, but I think you can get the idea of the significance of transportation cost in this business

The weighted average selling price per ton for limestone products is 97$, and the weighted average transport cost over 200 miles is 30$

This means that the price of the commodity on average increases 30+% if you want to transport it just a state away. So while of course there are still other factors that affect customers, in a commodity price is going to be the most important factor. I go through those details to make the point that unlike many businesses which compete with businesses of a larger region, the whole country, or the whole world, USLM has inherently limited competition.

They on paper sell commodities which should have cyclical prices, but the price of limestone has risen almost every single year for the past 40 years. Also, unlike most commodities the industry is consolidated as the top 5 producers make up the majority of the market, but not all limestone is equal and it’s worth going over.

USLM has very good quality assets which form the second aspect of their moat. USLM’s mines according to their annual reports have limestone of a very high quality (96%+ calcium carbonate). As stated before high-grade limestone that has a high percentage of calcite/calcium carbonate is not abundant. The grade of limestone makes it viable or not for many of the markets we talked about earlier. For example, you need high grade limestone for use in increasing crop yields, and for use in pharmaceuticals. It’s these high quality processed lime products which sell for much higher than cost. So USLM isn’t just a regionally low-cost producer, they have high quality assets which are not common at all and that helps to create enduring pricing power. These assets are not going away anytime soon, as they have the resources in the following mines at current production levels(3,851,000 metric tons) to produce for

Texas mine: 80 years

Oklahoma mine: 55 years

Arkansas mine: 25 years

Based on the limestone reserves and current production levels, USLM can supply itself for the next 60 years without any new mines. This is very antifragile and sets USLM up for lifelong profitability

Cyclicality

Many companies in the materials sector are brutally cyclical making them less resilient. However, USLM has had positive operating income every year going back to 1991, and their operating margin has not dipped below 10% since the year 2000. It is worth pointing out that USLM has 607 million in tangible assets compared to it’s total liabilities of 44 million. USLM’s cash and equivalents alone stand at 319 million. Meaning it could pay its entire book of liabilities 7 times over with just cash. This is not exaggerating like top 1 in 10,000 levels of balance sheet strength for a public business. Combined with their history of operating results, limestone’s demand which is growing from diversified sources and USLM’s moats I view USLM as having an incredible amount of durability against short and long term threats.

Microeconomics/Profitability

It’s worth noting that USLM’s economics are quite fantastic, I will paint a quick picture with the following numbers from the past 12 months of business (all metrics have been improving over the past decade, and moderately in the decades prior)

• Profit margin of 35%

• FCF margin of 30%

• ROA of 16%

• ROE of 25%

• Adjusted ROA of 35%

The adjusted ROA figure is assuming you did not include 250 million in cash and equivalents, which would leave USLM with enough cash to pay all of it’s liabilities, which is a balance sheet still healthier than 95+% of companies. This was made to help you understand just how profitable the core PPE is, and I also took off a couple % points to adjust for the small decrease in net income that comes from interest on the cash balance. That adjusted ROA figure would put this business which operates in a mine, commodity like, and typically asset heavy quarry business in the top stratosphere of profitability for publicly traded businesses.

Capital Allocation:

The best word to describe USLM’s capital allocation is

agnostic

Even a decade ago they had 200 million in assets compared to total liabilities of 30 million.

They repurchase a small number of shares each year to offset minor stock based compensation and have a dividend payout ratio of about 5%. I will say they have been modestly increasing the dividend recently. Overall, they return less than 10% of earnings to shareholders, but they also are only very occasionally acquisitive, and only use a 3rd or less of operating cash flow each year for total capex. So that has caused the already overcapitalized balance sheet a decade ago which had 6.5 times the amount of assets to liabilities to grow to the now 13.7 times the amount of assets for liabilities, and to the 21 current ratio on the balance sheet.

Often analysts complain if a business has an extra chunk of cash or has little debt, and the analyst is being a little short term focused. But this is probably the most extreme case of conservatism you will see in public business, and it does leave investors with some big unanswered questions as to how that cash will be used, and what the management’s intentions are and will be. I honestly have no idea where all this extra cash will go, ideally it could be put into more core PPE or a reasonably priced acquisition of a high quality limestone mine, but there is no way to know. History tells us operating cash flow will be put into very modest dividends and repurchases, and that some smallish but more significant portion will be used in maintenance capex with a little growth capex. While there is not at all good communication with the shareholders, it is worth mentioning that the current CEO has been there for 25 years, and over that time turned it into just about a 100 bagger.

Conclusion:

US Lime serves markets with enduring demand and which on the whole over time are likely to balance each other out for stability or small growth in their total demand for metric tons of limestone products. USLM due to the cost of transportation of these materials becomes competitively advantaged as the low cost producer in the local market around their mines. They are further entrenched from the not in my backyard effect, meaning local governments and municipalities are not going to be happy or content to approve 10 huge environmentally taxing quarries in a small area. This helps limit local competition as well as the need for the limestone deposits to fit the requirements of building out a full quarry. Even if transporting incredibly heavy things becomes incredibly cheap in the very distant future due to combining autonomous driving with solar powered durable trucks, USLM also just owns assets that are rare and limited in their quality which also gives rise to a moat. All of these factors combined with their extreme financial conservatism set them up to be incredibly resilient. Given they can produce for the next 50+ years based off their current mines, they are good for at least a little while.

Margin Of Wisdom

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