The following is an excerpt of Hedge Fund Alpha’s interview with Roubaix Capital’s Chris Hillary from the Q1 2024 issue of Hidden Value Stocks.
Chris Hillary is CEO and portfolio manager at Denver-based Roubaix Capital, LLC, overseeing about $165 million in long/ short small- and mid-cap (SMID) funds. He began his career in New York, specializing in fixed income at Morgan Stanley before relocating to Denver, Colo., where he joined the international-equities team at Marsico Capital.
Before founding Roubaix Capital in 2015, Hillary spent 10 years as an analyst and portfolio manager at Independence Capital Asset Partners, where he focused on all-cap U.S. equities in a long/ short fund. He prefers SMID-cap stocks because he believes they offer superior alpha-generation opportunities.
“Smaller-company stocks are better for fundamental stock-picking, as they are more directly driven by the opportunities and risks to their growth and profitability due to their lack of diversification compared to more diversified large-cap companies,” Hillary explained in an interview with Hedge Fund Alpha.
Long thesis for Newpark Resources
Chris highlighted Newpark Resources (NYSE:NR), which has market capitalization of $621.1 million. Roubaix Capital’s position in Newpark Resources also demonstrates its approach to investing.
Q: What initially drew you to this company?
A: We actively track businesses that are undergoing a material change in the business mix. In the case of Newpark, the previous management team focused on the company’s energy business. This made sense since it was the majority of revenues.
The energy segment produces low margins, requires a large amount of working capital, and competes with the larger oil service companies. As a result, we did not have interest in the company.
However, the company changed its management team in 2022, and they began the process of focusing on the higher growth and higher margins in their industrial business. Several assets were sold during 2022 and 2023, and this crystallized when the company announced its goal to fully exit the energy-related businesses in June 2023.
Q: What does Newpark do?
A: In the Industrial Solutions segment, which will be the entire company shortly, they manufacture and rent composite matting under the brand DURA-BASE, which is used for the construction end markets, including transmission and distribution, infrastructure, and energy generation. The mats allow machinery and equipment to be safely deployed in the field where it is necessary to keep a level and stable working surface.
The mats make the worksite safer and more productive while protecting the land from unnecessary damage. In fiscal 2023, Newpark generated impressive EBIT and EBITDA margins of ~25% and ~ 35% in the business.
Q: Can you share more detail on why you’re bullish on the opportunity for the company in general?
A: The outlook for Newpark is driven by several important trends. First, the Infrastructure Investment and Jobs Act (IIJA) includes $70 billion for electric grid and hardened energy infrastructure. Second, the Inflation Reduction Act (IRA) includes a $300 billion federal clean-energy tax package over the next 10 years.
Third, the U.S. spends ~$30 billion annually on aging infrastructure, systems hardening, grid reliability, and renewable-energy projects. Of this $30 billion, 10% is for temporary access and specialty rental and services. Fourth, U.S. investor-owned utilities are expected to spend over ~$140 billion on annual capital investments.
And fifth, the investments required for AI infrastructure, namely, data centers, only add to our electricity needs.
Q: Please explain your bull thesis for the company.
A: Besides benefiting from the industry’s steady growth trends, Newpark’s composite matting solutions are taking share from the incumbent solution, which is wood. Today, wood solutions maintain an 85% share, which is steadily shrinking.
Wood is an inferior material for temporary access solutions for several reasons. One, wood wears out quickly and is therefore less reliable. Two, wood costs more to transport. Wood weighs more than twice as much as Newpark’s DURA-BASE, requiring more truckloads. Three, wood is harder to install and requires a higher level of maintenance spending.
For these reasons, Newpark’s DURA-BASE composite mats are taking share. As a vertically integrated supplier, we feel the company enjoys durable competitive advantages leading to superiormargins (25% EBIT margins) and high returns on invested capital (ROIC).
Q: What’s your current target price for Newpark?
A: We believe Newpark is on track to earn ~$90M in EBITDA in 2026. Applying a 10x multiple generates $900 million in EV, and after the energy segment exit, the balance sheet is likely to have ~$100 million in cash, resulting in a $1 billion equity value.
The company has been a good steward of capital, repurchasing just over 10% of the shares in the last two years. We would expect them to either deploy the capital in an accretive way or further reduce the share count. After accounting for unallocated corporate expenses, we believe the stock is worth in excess of $11 per share with a long runway for consistent, high-single-digit to low-double-digit growth.
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