Bandag Bandit

There is an overlooked industry, which may not be growing by leaps and bounds, but could still be profitable for patient investors. Chris Mayer explores the this industry, and explains the hidden fortune in – retreaded tires…

In January 1988, Martin Carver slipped behind the wheel of the mammoth Bandag Bandit at the famous Bonneville Salt Flats in Utah. The Bandit was a 1978 customized Kenworth Conventional truck, some 25 feet long and 11 feet high, weighing about 8 tons. It set a new world land speed record in its class that day, clocking in at over 150 miles per hour.

What was otherwise notable about that achievement was that Carver was the CEO of Bandag Inc., a maker of retreaded tires, and that the Bandag Bandit achieved its feat on a set of retreaded tires.

The brave Carver made his ride to prove the durability of Bandag’s retreads – grooved rubber strips enveloped around old truck tires that provide good-as-new performance at a fraction of the price. "It was exciting and frightening," Carver said. "There’s not much traction on the salt, and with the wind going all around you, the handling can get pretty squirrelly."

Martin Carver is the son of company founder Roy Carver, and today runs a remarkable business, Bandag Inc., in a little-known and under followed industry that saves fleet owners billions annually. The inconspicuous nature of the business hasn’t hurt shareholders, who have enjoyed a 122% return over the last five years and have seen a pile of cash grow in the company treasury.

Retreaded tires are used the world over. Nearly all of the world’s airlines use retreaded tires. Nearly all off-road heavy-duty trucks use retreaded tires. School and municipal buses use them; so do the U.S. Postal Service and all federal and military vehicles, fire trucks and emergency vehicles. Trucking fleets, delivery trucks, taxis, racecars, industrial vehicles and farm tractors – all use retreaded tires. In short, retreaded tires are nearly everywhere and are a core component of any company’s fleet.

Retread Tires: The Economics Behind Them

Why are they so common? It is because the economics behind them are so compelling. Really, it’s a matter of simple arithmetic. Consider the trucking company that decides to get a new set of tires for one of its trucks. These new tires can easily run $400 each. To outfit an 18-wheeler, you’re looking at a $7,200 investment. However, if you could retread the tires for $100 each, you’d slice the cost of that investment by 75%. As an added bonus, you can safely retread a tire three or four times. Trucking companies in North America save an estimated $2 billion annually because they use retreaded tires. In fact, for most trucking companies, tires represent the third-largest expense in their operating budgets – right after labor and fuel costs.

Retreaded tires are especially important these days, because the price of oil is so high. According to the Tire Retread Information Bureau, it takes about 22 gallons of oil to make a new truck tire, while retreading a tire requires only 7 gallons. This is because most of the oil used to make a new tire is in the casing, which is reused in a retread.

Retreaded tires get about the same mileage as new tires, at a much lower cost per mile. Of course, retreaded tires are environmentally friendly, too, since not only do they consume less oil in the manufacturing, but every retreaded tire also saves a tire from going to a landfill. Retreading is a form of recycling.

Without retreaded tires, our dependence on oil would certainly rise, scrap tire piles in landfills would surge and the cost of many consumer products would probably rise in conjunction – things like groceries (nearly all grocery delivery vehicles use retreads) and just about anything that has to be shipped on trucks, as well as a host of other products and services like airline tickets and construction.

The point is that retreaded tires play a fundamental, if unseen and unappreciated, role in the working machinery of the world’s economy. This idea fits perfectly with our theme of providing key products and services of long-standing importance. And the company we are putting in our portfolio this month has 45% of the market.

Retread Tires: Are They Safe?

The question naturally arises about the safety of retreaded tires. Are they safe? The blowouts that you sometimes see on the road are almost always due to internal damage to a tire’s steel casing and not to loose-fitting retreads.

Nonetheless, it takes quite a bit of craftsmanship and precision handwork to make a safe, quality retreaded tire. There are a lot of ways to retread a tire, but the Bandag method is called a cold-capping process, because it exposes the tires to less heat during the vulcanizing process than the older "hot-capping" process. The Bandag process creates a higher-quality retreaded tire with better performance characteristics, and its products sell for higher prices than many of its competitors’.

A man named Berhard Anton Nowak in Darmstadt, Germany, developed the Bandag method of retreading tires. In fact, the name Bandag comes from Nowak’s initials, D for Darmstadt and AG, which is German for "incorporated." The Bandag tire-recapping process was so effective it gained the attention of the Wehrmacht and was used by Erwin Rommel’s Afrika Korps during World War II.

In 1957, Roy Carver bought the rights to the process and brought it to America. Specifically, he brought it back with him to Muscatine, Iowa, where Carver had founded Carver Pump, the manufacturer of the world’s first automatic pump. In Muscatine, Carver opened shop in an empty sauerkraut factory and streamlined the manufacturing process using machinery from his pump factory. From this rather humble beginning, an $800 million business was born, and today it has a 45% share of the market for retreaded tires.

As an aside, Muscatine was apparently the pearl button capital of the world at one time and now claims to be known for pumps, tire retreads, animal feed, corn wet milling and expertise in engineering and architecture. Mark Twain once wrote, "I remember Muscatine for its sunsets." Whatever one thinks of when the name of Muscatine is bandied about in polite society, today this small town of 23,000 continues to be the home of Bandag.

Bandag has two business segments. The first is the manufacture and sale of tread rubber and equipment, which is then used to retread tires. The second is the sale of new and retreaded tires through its wholly owned subsidiary, Tire Distribution Systems. By far, the more important of the two is the first segment, which makes up more than 80% of the company’s profits.

The company and its franchisees operate over 1,000 locations worldwide. About one-third of these are in the United States, with the rest all over the world – in Europe, South and Central America, Africa, Asia, Australia and New Zealand. The company also has joint ventures in India.

Most of Bandag’s franchisees operate independent tire distributorships, and the Bandag retreading product is one service, among many, that they offer. Bandag manufactures the tread rubber and related supplies in its own plants in the United States, Canada, Brazil, Belgium, South Africa and Mexico. It still has to buy raw materials, mainly rubber, from outside suppliers. The company has never had any trouble getting the rubber it needs, but the price of rubber has been rising (along with most commodities), and this has put some pressure on the margins of the tire makers.

The company has virtually no long-term debt. Bandag has a fortress for a balance sheet, which will it see it through tough times and allow it to make good investments and take advantage of opportunities.

Growth in this industry is not going to be made in leaps and bounds. In fact, much of the tire business is struggling under rising commodity costs, which are only slowly getting passed on to consumers. Still, there is enough here to grow 10-15% over the next several years. For one thing, the trucking business is strong, and the increased activity bodes well for future tire replacements and retreads. Plus, increased vehicle usage is almost a foregone conclusion as populations expand. As long as Bandag can maintain or grow its 45% market share, it will see an increase in business.

Time is the friend of the great business, as Warren Buffett often preaches.


Chris Mayer
for The Daily Reckoning
April 13, 2005

P.S. I’ve found another great company for my readers…this cash-rich utility churns out 300% profit margins day after day after day. It owns and operates 120 concrete hydroelectric dams in the United States and Canada. And these low maintenance concrete slabs produce electricity for one cent per kilowatt-hour and sell it for four! That works out to a 300% profit margin. It has the ability to make you 20% profits year after year after year. But it isn’t the only wealth-producing asset this company has.

Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Daily Article series to here in The Daily Reckoning. He is also the editor of the Fleet Street Letter.

Remarkable things happened yesterday. We read the paper this morning and found at least six impossible things before breakfast. February’s trade deficit rose to $61 billion – a new record. What this means is that the residents of "Squanderville," as Warren Buffett calls the United States, are frittering away their wealth faster than ever. Every day that goes by, they spend $2 billion more than they make.

And yet, investors saw no problem. According to the report in the International Herald Tribune, Alan Greenspan’s Federal Reserve told investors that the economy was in good shape and that inflation risks are "now tilted a little to the upside." This they took to mean that the nation’s central bank would continue its baby steps towards normalcy…rather than stand up and act normal right away.

In the currency markets, investors bought the dollar – despite the fact that the rising trade deficit practically dooms the greenback to fall. In the stock market, they turned bullish too, mostly out of habit.

We are such hopeless romantics, here at the Daily Reckoning headquarters. We woke up this morning believing that booms follow busts…that people get what they deserve…and that love lasts forever. Then, we read the paper…and wondered. Still, even if the world doesn’t really work the way we think it should – it ought to. And you, dear reader, ought to act as though it did…even if it doesn’t.

"Dere’s dem dat’s smart…an’ dere’s dem dat’s good," said Uncle Remus. People today don’t even know who Uncle Remus is. Some people want to arrest you for quoting him in the original vernacular. But the man was a genius.

When we were younger, we were a lot smarter. But as the years go by, many of the things we once thought were so smart don’t seem so smart anymore. And now we’re dumb enough to realize that no matter how smart we think we are, we are never quite smart enough. We think stocks are going up…we think we can build a better world in Mesopotamia…we think can tell the fellow down the street how to discipline his children or decorate his house…

But now…what do we know?

The best we can do is to do the right thing…the good thing…and even that is hard to do. It is easier to be smart than to be good; that’s why there are so many smart people, and so few good ones. Smart men get elected to high office. They run major corporations. They write editorials for the newspaper. Pity the poor good man; he goes to parties and has nothing to say that is not mocking and cynical. Others talk about their smart deals…their smart ideas…their smart plans and successes. Women crowd around them; a smart man grows taller as he speaks. The good man shrinks.

Vanity is what makes the world go round, dear reader. Americans were lucky. Now, they are vain. They believe that there is some magic to their economy…their government…their whole society…that makes it possible for them to be soooo smart that they no longer have to do the right thing. In Iraq, the American Secretary of Defense is giving elected officials advice on how to act. The man from Halliburton, ‘warns against cronyism’ says the IHT headline. And in the homeland, American householders are delusional: "Save money? Why should I? My house is increasing in price at 20% per year!"

In both instances, we wait for the laugh track…in vain! Because everyone knows that meddling in the internal affairs of Iraq and Afghanistan has been a great success. And house prices will go up forever; Americans really don’t need to save money. They can just sell their houses to each other. Everyone is "in real estate" these days. Half of the new jobs in California in the last two years have been connected to the house bubble. In Santa Cruz, there is a "flood of real estate agents," says the local paper.

Savings rates have fallen from 10% when Reagan first entered the White House, to less than 1% today. How can people expect to get rich without saving money? How do they expect to pay for all those smart houses they are buying? How do they expect to build new factories…and earn more money?

Ahh…but they are not earning more money. They are getting what they deserve, after all. The New York Times confirms what we have been saying for years – real wages in America are going down. They went last year, says the Times. And yet the people who earn less still spend more. How smart is that?

More news, from our team at The Rude Awakening:


Tom Dyson, reporting from Baltimore…

"All anecdotal data point to a sharp rise in inflation, yet the Fed thinks consumer prices are under control. Smell the coffee, Greenspan, or even better, just buy some…"


Bill Bonner, with more views from London:

*** The price of gold is back up to $429. We have no idea what will happen to the price of gold in the future. But gold is what we buy when we suspect that people aren’t as smart as they think they are…

Our "Trade of the Decade" is very simple. Buy gold, sell stocks. Currently, you can buy 24 ounces of gold for one unit of the Dow. The ratio has been as high as 40 and as low as 1. It is low when people feel fearful and stupid. It is high when they are complacent and smart. We announced our "Trade of the Decade" when the decade began. So far, we have done well. Gold has risen from under $300 an ounce to over $400. Stocks have gone down…but not nearly as much as we think they ought. We hold. We wait. We are happily cynical, and hopelessly romantic old fuddy-duddies.

*** Poor MG Rover. The last of the British automakers is out of business. This week, workers were sent home. The company tried to work out a deal with a Chinese company, but it fell through at the last moment.

We actually owned an MG many years ago. It was an MGA of 1962 vintage. What a snappy little sports car! What a piece of junk! It rarely ran right. We spent more time under the hood than in the driver’s seat. It even had a hand crank, which came in handy. After you had worn the battery down trying to get the thing started you could wear yourself down turning the crank. But, when the sun was out…and the motor was running…what a delight! We put the top down and cruised around the tobacco fields of Southern Maryland. There was really nothing to do…and nowhere to go – but what fun it was getting there.


*** But what’s this? Britney is pregnant! Britney who? And why should we care about that? We don’t know…but it is reported as news in the American press. If were to continue following the story…eventually, we would wonder how her pregnancy was going…and we could share her joy when the baby is born. If that happens to us, dear reader…please promise you will pull the plug and take out the feeding tube.

*** And there, on the editorial pages of the IHT, is more entertainment. Advice for China…warnings to Russia…comments on the Vatican… it is like a chat room for busybodies!

The Daily Reckoning