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Why I’d shun the Sirius Minerals share price and buy this superstock instead

Kevin Godbold
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Despite my bearish articles about Sirius Minerals  (LSE: SXX), I’m bullish about the prospects for the underlying business. I think there’s a good chance that the firm will manage to execute the building and development of its Woodsmith Mine in North Yorkshire and all the infrastructure necessary to access “the world’s largest and highest grade polyhalite deposit.”

I’m confident that, in the end, pre-committed customers will receive their supplies of the firm’s poly4 multi-nutrient fertilizer product and revenue will begin rolling in for Sirius Minerals. However, in situations like this where the firm has yet to generate revenues, cash inflow and profits, I reckon it’s even more important than ever for me to separate my opinion about the stock from my opinion about the underlying business.

Beware of speculation

The danger comes from the situation that we have little financial information to work with to form a judgement about valuation. We know the current share price close to 34p puts the market capitalisation at £1.6bn or so, and we know the firm needs to spend millions to complete its build project. We know the estimated polyhalite resource in the ground is around 2.6bn tonnes, and we know the firm has signed incremental supply agreements with customers upwards of 4.4m tonnes per annum.

We won’t know for sure what the final costs and financing requirements will be until the construction project is complete, and we can’t be certain about how profitable trading operations will be until they are under way. In the meantime, the market is estimating and guessing, which at times could lead to speculation driving the share price too high.

My Foolish colleague Roland Head made a good case for buying the dips of the share price and avoiding the peaks. That’s a reasonable approach, but my own preference is to avoid the stock altogether for the time being with a view to revisiting it when the mine-building and infrastructure project is further towards completion. So I’m shunning Sirius Minerals and looking at alternatives, such as industrial fastenings manufacturer Trifast  (LSE: TRI).

An essential cog in the wheel of manufacturing

I’ve labelled Trifast a superstock because you could have bought shares in the firm during early 2009 at around 10p each. Today’s 265p means that if you had, you’d be sitting on a sum around 26 times your original investment due to capital gains, with dividend income on top. Trifast is also a superstock because the annual total dividend has risen more than 600% over the past six years.

With today’s full-year results report, the good news on trading continues. At constant exchange rates, revenue moved up 4% compared to the year before and underlying diluted earnings per share increased by 4.4%. The directors expressed their confidence in the outlook by pushing up the total dividend for the year by 10%.

Around 65% of sales during the year were to multinational Original Equipment Manufacturer’s (OEMs). Trifast provides an essential cog in those firms’ manufacturing processes leading to repeat business and steady cash inflow. As long as the wider manufacturing sector thrives, this firm is likely to thrive too, and right now the directors are investing for further growth. I think the business is well worth your research time right now. 

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.