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Tidbits for Temperament

Aaron Monroe, CFA

We have previously emphasized the significant benefits of developing a deep understanding of how a business is built to stay rational and patient during challenging times. This can help us step in and add capital when others may be overcome by fear.

This same sentiment is equally valuable on the flipside — we want to rely on our understanding of a business to remain patient during periods when fundamentals have the potential to be stronger than we anticipated. If a business is positioned to capture that strength, and that is not yet reflected in the price, we want to remain steadfast so that we and our clients can benefit.

Often, in the nuance of information we are sifting through, we can find a nugget here or there that can be that additional piece to the puzzle to keep us patient and focused on the business. We want to highlight two tidbits from the most recent earnings season.

Square Dance with Cowboy Carter

As investors in the consumer space, we have repeatedly observed how fashion trends can transform brands from nothing to highly valuable franchises. Brands like Lululemon, The North Face, Crocs, and UGG, to name a few. Some brands are exceptional, and some are merely fads, but no one can refute that catching the front end of a trend can significantly benefit a business. That is why a comment made on Rocky Brands most recent earnings call caught our attention:

Turning to our western category, Durango delivered a very good first quarter, lifted by strong bookings across key accounts and Farm & Ranch partners, along with an acceleration of at-once business. With moderate partner inventory levels, better-than-expected consumer demand for key Durango styles led to some brief and early stock-outs. However, we moved quickly, and we were able to fulfill orders late in the quarter and ship additional inventory of in-demand product, which should lead to even higher turns for Durango going forward.

This statement may seem innocuous, but one would be remiss to discount the fact that this past February, Beyonce released her single “Texas Hold ‘Em,” followed by her latest album “Cowboy Carter,” and interestingly enough, an acceleration of at-once business coincided. To be clear, this is definitively not a reason to own a company. We own Rocky Brands due to its customer loyalty, brand strength, attractive valuation, and a belief that we have yet to see the true earnings power of the business given its self-inflected wounds from the XTRATUF acquisition in 2021 combined with the challenging operating environment for the industry directly following.

This type of information snippet and potential piece in the puzzle can lead us to have additional patience as fundamentals may move in a way that could provide some positive surprises. Another interesting tidbit is that there are few publicly traded Western boot companies — among them is Justin Boots, which is owned by Warren Buffet’s Berkshire Hathaway.

This IS Texas…

Headquartered in Dallas, Texas, US Lime and Mineral is a business focused on lime and limestone products with end markets such as infrastructure, construction, oil and gas, and roofing. Regional presence is vital because limestone products are heavy and cannot be shipped far distances economically — typically, products stay within roughly 400 miles of a plant. The company is a solid operator that flies under the radar with no sell-side coverage and no earnings call, but a couple of items caught our eye in the most recent earnings release:

  • Management removed the following statement from its 10-Q: Looking ahead, we anticipate continued weak demand in some of our key markets as everyone deals with the impact of continuing inflation, higher interest rates, and increasingly uncertain geo-political situations.
  • While adding: Looking ahead, we anticipate improved demand from our construction customers.

Over the past two quarters, the company has taken a more cautious tone, calling out some volume decreases — particularly from steel and construction customers — but selling prices have been solid, offsetting the volume decrease and driving solid results. So, despite management calling out reduced demand from construction customers during the quarter, they also noted that increased demand from industrial customers provided a partial offset to volumes and appeared to be taking a little bit less of a cautious tone.

Several secular tailwinds are boosting investment along the I-35 corridor where US Lime & Minerals operates, which could provide additional means for the business to continue to compound value. The nuance in the statements from the 10-Q assists our ability to remain patient with the company and hopefully not exit too soon despite recent strength.

To reiterate, these examples are not reasons to own a business in and of themselves. However, they are small pieces of information that we may identify as we dig through earnings season and can be worth paying attention to.

As of 30 April 2024, Diamond Hill owned shares of Rocky Brands Inc and United States Lime & Minerals Inc.

The views expressed are those of Diamond Hill as of June 2024 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.

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