VALHI INC /DE/ (VHI) stock intrinsic value fair value estimate & owner earnings analysis

Valhi is a Dallas-based holding company that is itself 91% owned by Contran, the Simmons family company, so only about 9% of the shares trade publicly. Valhi's value comes from controlling stakes in operating businesses: Kronos Worldwide, one of the world's larger producers of titanium dioxide (TiO2) white pigment used in paints, plastics and paper, with plants in Germany, Belgium, Norway, Canada and Louisiana; CompX, a maker of security locks and marine components; and BMI and LandWell, which provide utility services and sell residential land in the Cadence community in Henderson, Nevada. Valhi owns about 76% of Kronos (50% directly plus 31% held through NL Industries, which Valhi owns 83% of), and roughly three quarters of the group overall. Kronos dominates the results, so Valhi's earnings follow the TiO2 cycle. Because the subsidiaries are consolidated in full, we first value the whole group's cash flow, subtract all group debt, and then credit Valhi shareholders with about 75% of what is left; the remaining quarter belongs to the other owners of Kronos, NL, CompX, BMI and LandWell. Owner earnings. We start from operating cash flow, remove swings in receivables, inventories, payables, land held for sale and similar working-capital items, and deduct capital spending, treating spending tied to revenue growth as optional. Stock compensation is negligible. Cash paid for pension, environmental and litigation obligations was left in as a real cost. On that basis, group owner earnings after interest were wildly cyclical over 2016-2025: about -$6M, $178M, $178M, $136M, $91M, $237M, $56M, -$50M, $129M and -$51M. Adding back cash interest gives the cash the business produces before paying its lenders: about $174M in 2019, $124M in 2020, $266M in 2021, $82M in 2022, -$24M in 2023, $174M in 2024 and about $0 in 2025. We use the 2019-2025 cycle, whose median is about $124M a year. We left out 2017-2018 because those boom years came from Chinese plant closures that have since reversed into Chinese oversupply. A separate check based on net income gave a similar median of about $125M. Recent results. Cash flow before interest fell from about $174M in 2024 to roughly zero in 2025, when European demand was weak, Chinese pigment flooded export markets and Kronos cut production. The base case's first year assumes about $110M. We expect that turnaround because of reported results, not hope: Valhi's consolidated net income for the first half of 2026 was $43.3M versus $30.3M a year earlier, and in August 2026 Kronos reported a second-quarter profit on higher sales volumes and lower production costs. Anti-dumping duties on Chinese TiO2 in the European Union, and European plant closures by competitors, support Kronos's volumes, but we did not credit them with any growth. Base case (median): about $110M in year one, then the 2019-2025 median of about $124M a year. We remove about $15M a year after year eight because LandWell's land in Henderson is finite and will eventually be sold out. We credit no growth: TiO2 is a cyclical commodity, and Kronos has not shown growth that is secured or repeatable. Kronos's plants have run for decades, and the capital spending charged above keeps them running, so we let the cash flow continue to year 30 and then stop. We stop there because European plants face rising energy and carbon costs. The business is worth about $1,575M. Subtracting about $484M of net debt leaves about $1,091M, of which Valhi's 75% share is about $818M, or about $28.71 a share. Net debt: about $612M of borrowings, which is $591.7M at the end of 2025 plus an estimated $20M added in the first half of 2026. This is mostly Kronos's 9.50% senior secured notes due 2029 ($503.7M), a $53.7M Kronos term loan from Contran, Valhi's $23.6M Contran credit facility and a $10.7M LandWell note. Against that we set about $175M of cash and securities beyond operating needs. We add about $48M because the 9.50% notes cost well above our 6% rate until 2029. Bear case (10th percentile): Chinese oversupply persists and the weak 2022-2025 pattern becomes normal, averaging about $58M a year before interest after a poor first year of $30M. Then, from year 11, Kronos's European capacity fades to nothing over a decade, as several competitors' European plants already have. On that path the business barely covers its roughly $55M annual interest bill. Refinancing the 2029 notes would cost about 10% instead of 6% for another five years, adding about $71M of cost. The business would be worth about $519M against about $556M owed, about $36M short. The shares would be worth roughly -$0.96: the group would owe slightly more than it is worth. Bull case (90th percentile): the European duties and competitors' closures let Kronos return to the roughly $200M a year it earned before interest in good years like 2019, 2021 and 2024. We assume $140M in year one and $180M in year two, then $200M through year eight and about $185M after LandWell sells out, to year 30. The business would be worth about $2,565M, less $484M of net debt, leaving about $2,081M. Valhi's share is about $1,561M, or about $54.76 a share. What could make this wrong: a further collapse in TiO2 prices, the 2029 refinancing at Kronos, rising European energy costs, or decisions by the controlling shareholder that favor Contran over minority holders, such as related-party loans or a buyout of the public shares on unfavorable terms. Our previous estimate ($10.95 base) used higher, risk-loaded discount rates. We now discount every company at a fixed 6% and charge risk only through the bear case, value the business before debt and then subtract what it owes, and include the cost of the 9.50% notes. Those changes, plus the first-half 2026 recovery, explain most of the increase. Working-capital items were presented inconsistently across years, so we rebuilt each year directly from the cash flow statement. Large swings in long-term liabilities, which partly reflect cash received in advance for land sales, could not be fully broken out and were left in owner earnings.