America Still Makes Stuff

“This has always been a nation of builders. Craftsmen. Men and women for whom straight stitches and clean welds were matters of personal pride. They made the skyscrapers and the cotton gins. Colt revolvers. Jeep 4x4s… This was once a country where people made things. Beautiful things. And so it is again.” – A commercial for the Jeep Grand Cherokee

It’s a common lament to say that US manufacturing is in decline. It’s received wisdom that the US doesn’t make anything anymore. In fact, I myself have repeated it.

I am here to correct the error of my ways and to dispel this common myth. And I’m going to tell you about a company with four of the five lowest-cost plants in the world in its industry. These plants are not in China or India. They are in the US.

In truth, there is a lot of stuff made in the US, which is still a mighty giant in manufacturing.

The broom sweeping away the old cobwebs is research from a group called Turner Investment Partners. This is a firm out of Berwyn, Pa. It manages $18 billion. Turner put together the eye-opening report called, US Manufacturing: Still the One.

“The US remains the world’s leading manufacturer, by far,” the authors write. “Indeed, if the US manufacturing industry were a national economy, it would be the eighth largest in the world, worth $1.6 trillion.” All by itself, the US is 22% of global manufacturing. As an exporter, it ranks third behind only China and Germany, with an 8% market share.

That is a pretty big blow to the idea that the US doesn’t make anything anymore. But how can this be? We all see the same headlines, such as the big failure of US autoworkers. We see the “Made in China” label slapped on nearly everything. We know Japan makes all kinds of electronics that the US no longer makes. We hear about companies moving plants overseas.

This is where things get more interesting.

Since 1983, manufacturing output in the US has more than doubled. (This, in inflation-adjusted dollars, by the way, makes the feat all the more impressive.) But it did so with about 26% fewer workers. As a result, 50 years ago, about 28% of all workers got their paycheck from manufacturing. Today, only 8% of the work force does.

That work force, though, is very productive. It’s doing a lot more with less. As Turner reports, “US manufacturing workers…are the most productive – 50% more productive than workers in the 11 next-best nations.”

So it’s like the headlines about shark attacks that were common some summers ago. The headlines made it seem as if shark attacks were more common than they were. The public failures of big manufacturers and the headline-grabbing job losses have obscured the real story.

The real story is that the services sector has grown much faster than manufacturing. So when you look at manufacturing’s share of the US economy, it has fallen from 28% in 1953 to only 12% today.

We may weep over the fact that the US economy is so service-driven, but that’s not the same as saying that US manufacturing is in decline. The US is still the world’s largest manufacturer.

The nature of that manufacturing base is also changing. One way is that the companies populating the forest now tend to be smaller. There are fewer giants. “According to the Cato Institute, for every one US manufacturing industry that’s suffering a decline in revenue and profits, two US industries – led by small companies – are growing”

The above are just some highlights from Turner’s report. My main goal here is to leave you with a different perception of American manufacturers. They are not like dinosaurs on their way to extinction. In fact, some of them are great investments.

We’ve talked a lot about the expanding global middle class. It seems clear to me that people will use a lot more consumer products, such as cell phones, computers and TVs. As investors, though, it can be tricky to figure out which cell phones or computers. There are a lot of competitors. Sometimes it’s easier betting on the underlying commodity that they all rely on.

Silicon metal is one such commodity. You find it in all kinds of consumer goods. It’s a metal, like steel, that people make. The basic recipe for making silicon metal is 2.8 tons of quartz, 1.4 tons of coal plus 2.4 tons of wood chips. Put it all together in a fiery furnace and you get one ton of silicon metal. It’s not just as simple as this, but those are the basics.

If you know about silicon metal at all, maybe you’ve heard about its use in solar cells. This is the fastest growing use of silicon. The Norwegian Institute of Technology projects that solar cell usage alone will surpass all other applications combined by 2020! Just in the next three years, demand could double. If this pans out, we’ll make a fortune.

Steel and aluminum makers also use silicon metal. A big driver of silicon use in recent years has been the increased use of the metal in aluminum in cars to make them more fuel-efficient. Over the last 30 years, the aluminum content in a typical car rose from 77 pounds to 326 pounds. Silicon also finds its way in numerous coatings, resins, rubbers and oils. You find it in shampoos and toothpaste. It’s really a workhorse metal. And in many applications, there is no substitute.

Fortunately, there is a great way to invest in silicon metal. The company is Globe Specialty Metals (NASDAQ:GSM). You can make a lot of money in specialty metals when you buy them right – as our experience with titanium shows. The key is that you have to buy the stocks when the metal prices are cheap and when the stocks are below replacement costs. You want a great balance sheet and a company that makes money even in bad times, as TIE did. Globe sets up in a similar way. Let’s take a look.

Globe is certainly global, with nine facilities – four in the US, two in Argentina, one in Poland and one in China. Most importantly, the four US plants are among the five lowest-cost producers of silicon metal in the world. I always like investing in the low-cost producers. I sleep better at night knowing my guy makes money even in bad times. Globe is also a sizable player in this field, with about 7-8% of the world’s capacity.

Globe sells to a broad base of users. Globe’s customers are diverse, but two biggies are Owens Corning and Wacker. These two chemical companies make up about 10% of sales each.

Globe is trading for around $12.60 per share as I write. The replacement value – or the cost to build these assets – is at least $22 per share. The cost to build a single furnace is about $100 million. And it also takes about three-five years. Globe has 17 such furnaces. That’s a replacement value of $1.7 billion. There are 78.3 million shares (including 4 million in options). Do the math and you get $22 per share. This does not include any value for Globe’s net cash ($2.20 per share), quartz mines, forestry reserves – for the wood chips – or its stakes in joint ventures and hydropower facilities.

Beyond this, Globe is cheap on the potential cash flow it can generate. If silicon prices stay where they are, Globe could easily earn over $1 per share after-tax free cash flow next year. If prices for silicon rise, Globe’s earnings climb big-time. Silicon metal prices are low, which is why the replacement values are so large compared to the stock price. It doesn’t make sense to build a new plant at current prices. So as demand grows and supply sits, prices will rise.

Just so you can get a sense for the upside here, I’ll quote Meryl Witmer, of Eagle Capital, on Globe, from an interview with Barron’s:

Silicon-metal prices would need to get to at least $2.20 to make it worth adding capacity [for the industry]. If the metal sells for $2 a pound, GSM would be able to earn north of $3 a share… Prices should get to $2 sometime in the next few years, assuming there is growth in the world economies. Our near-term price target for GSM is $15-$17 a share, but our longer-term target is $35.

I think she has it exactly right – and $35 is a near triple from here.

Be patient here, as stocks like this can be quite volatile. (This isn’t Proctor & Gamble.) Buy a little now and average in.


Chris Mayer
for The Daily Reckoning

The Daily Reckoning