Something strange is happening in the heartland of America. Oil-Dri, a company that has silently served the nation for 84 years, is experiencing a surge in financial performance that seems to have caught most analysts off guard. While the headlines boast record sales and double-digit growth, a deeper dive into the recent earnings transcript reveals a subtle, yet potentially explosive detail: Oil-Dri's commitment to strategic shedding of low-margin business might be setting the stage for a future marked by even more substantial profitability.

This isn't just about tightening belts or riding a temporary wave of industry tailwinds. This is about a meticulous, almost surgical approach to maximizing value from every single ton of sorbent mineral they mine. It's like a chess game, with Oil-Dri strategically sacrificing pawns to gain control of the board and ultimately secure a decisive victory.

Consider this: in 2001, Oil-Dri moved over a million tons of product, generating $161 million in sales with a meager $28 gross profit per ton. Fast forward to fiscal year 2023, and sales have soared to $413 million with an astonishing $127 gross profit per ton, all while selling fewer tons. This remarkable feat underscores the company's laser focus on extracting maximum value from its core operations.

Oil-Dri: Shifting from Volume to Value

But the story gets even more compelling. The recent Q2 2024 earnings call transcript reveals that Oil-Dri's strategic shedding is far from over. Within the consumer division, they are actively and purposefully walking away from low-margin business, even if it means a temporary dip in reported sales volume. This bold move suggests that the company sees an even brighter future, one where profitability takes precedence over chasing fleeting sales numbers.

The numbers from the first quarter of fiscal 2024 offer a tantalizing glimpse of what this future might hold. Despite a decrease in tons sold due to a customer outage, the average selling price per ton jumped to $562, with the gross profit per ton reaching a record high of $156. These figures suggest that the company's strategic shedding is already bearing fruit, paving the way for potentially explosive earnings growth in the coming quarters.

"Key Takeaway: Oil-Dri is deliberately choosing profitability over volume. They are willing to sacrifice short-term sales growth for long-term value creation."

Is the Market Underestimating Oil-Dri?

This begs the question: is the market underestimating the impact of Oil-Dri's strategic maneuver? Could this deliberate shift in focus, largely overlooked by analysts fixated on top-line growth, be the catalyst for a surge in share price beyond even the most optimistic projections?

The hypothesis is compelling. As Oil-Dri continues to shed low-margin business, its profitability metrics are poised to skyrocket. The impact on earnings per share could be substantial, driving a reevaluation of the company's true worth in the eyes of investors. This, coupled with Oil-Dri's strong balance sheet and consistent dividend growth, paints a picture of a hidden gem waiting to be unearthed.

A quick back-of-the-envelope calculation reveals the potential magnitude of this hidden gem. Assuming Oil-Dri maintains its current pace of strategic shedding and achieves an average selling price of $600 per ton with a gross profit margin of 30% in fiscal year 2024, the resulting earnings per share could reach $8 or even $9. This represents a significant jump from the current EPS of $5.81 and could propel the share price into uncharted territory.

Disclaimer: This is a hypothetical scenario for illustrative purposes only and should not be considered financial advice.

Oil-Dri's Gross Profit per Ton Growth

The chart below highlights Oil-Dri's impressive growth in gross profit per ton, demonstrating their focus on value creation.

While the future is always uncertain, the signs are undeniably promising. Oil-Dri's unwavering commitment to creating value from every ton of mineral, coupled with its strategic shedding of low-margin business, is a powerful combination that could rewrite the company's narrative in the years to come. The ghost of Oil-Dri's founder, the man who built this quiet giant from the ground up, must be smiling indeed.

Oil-Dri Corporation of America Q2 2024 Earnings Conference Call Transcript

March 8, 2024

"Fun Fact: Oil-Dri's sorbent minerals are used in a wide array of applications, from everyday products like cat litter to industrial processes like refining edible oils and renewable diesel. You might be interacting with their products more than you realize!"