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Genco Industries: $15 Million in Cash and the Company for Free

September 28, 2011 | About:
Benjamin Graham was in love with the companies which traded below liquidation value. He constantly picked a diversified portfolio of stocks trading at working capital, net working capital and net cash level. Today, people are getting scared off from the stock market, which is why we can again find several good stocks that Graham would love.

One good “cigar butt” stock that I’m writing about today is Genco Industries (GENC), the leading manufacturer of heavy machinery used in the production of highway construction materials, synthetic fuels and environmental control equipment. The company has two manufacturing sites, one in the U.S. and the one in the UK.

The business is quite seasonal. It is reported that the majority of orders for Genco’s products are received between October and February, with a significant volume of shipments occurring before May. Because it is involved in highway construction industry, the demand for Genco’s products mainly fluctuates with the level of government funding for domestic highway construction and repair, and infrastructure development in emerging economies.

Regarding the level of profitability, for the previous 10 years, it has had only one year of negative net income, in fiscal year of 2009, and the rest were profitable. That is why the company could grow its book value from 26 cents per share to $10.28 per share within 10 years, making annual compounded growth of 44.4% per year.

Regarding financial health, it has a very strong balance sheet and is very liquid, with nearly 72% in cash and marketable securities. The company is very conservatively financed, with only 8% in total liabilities, no long term or short term debt. In terms of dollar value, in June 2011, it had total cash and marketable securities of around $83 million, with no interest-bearing debt. With the market capitalization of $68.15 million, the enterprise value of the company stays at -$14.85 million.

Benjamin would definitely consider this stock to be in the basket of his portfolio. The net cash level (when we take cash minus total liabilities), it is at $72.4 million, 6% more than its current market capitalization. And the proxy for liquidation value (which we take current working capital minus total liabilities) is around $95 million, trading nearly 40% more than its current market capitalization.

With the stock trading below net cash level, and with the negative enterprise value, it means if we buy a whole company, we would right away benefit $14.85 million more. And if we liquidate its inventories, receivables, giving away its fixed asset for free, we would get around $27 million in total. Additionally, if we leave it there, it is still earning money, and the TTM P/E is staying at 10x right now.

Disclosure: Long GENC

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.5/5 (10 votes)

Comments

Adib Motiwala
Adib Motiwala - 3 years ago
Hi Anh,

Looking at Cash flows, i see Cash from Ops has been mostly negative. Also, yes Net Income was only negative in 2009 but operating income was also negative in 2010, 2003 and 2005.

However, balance sheet has more cash than market cap.. So an interesting idea.
ken_hoang
Ken_hoang - 3 years ago
Hi Adib,

Thanks for your comment. Yes, the cash flow from ops mostly negative, the positive in cash over time is back by the CF from investing, which is marketable securities.

and it is actually the asset play, not the earning play, it is the plus only if the earning is positive.

batbeer2
Batbeer2 premium member - 3 years ago
Hi guys,

Yeah, Gencor is interesting. The headquarters alone is worth $15m-$30m... drive there with google.

1) It seems to me the negative operating margin comes from depressed gross margin. They typically run at >20% gross margin and now it's 16%-18%.

2) On the balance sheet, you can see inventory going down while the cash is piling up.

Low gross margin, declining inventory and rising cash..... it's a a clearance sale !

CFO turnover is a bit high for my taste. If memory serves they went through 3 CFOs in five years. The rest of the management is a family affair. That's not a combination I like to see.
ken_hoang
Ken_hoang - 3 years ago
Thanks for your comment Batbeer,

Genco hasn't been in the list of stock to hold for the long-term, and it's not earning power play, it is an asset play, it is like "cigar butt" type, the holding of GENC should be combined with other holdings in the diversified basket. So normally for those type, I do not care much on the operating performance, the positive earning and the positive cash flow is a a plus only.

batbeer2
Batbeer2 premium member - 3 years ago
>> and it's not earning power play, it is an asset play.

Yes. I like the ones that are both.
ken_hoang
Ken_hoang - 3 years ago
haha true, same with me. That would be the best positions.
phil.kazmaier
Phil.kazmaier - 3 years ago
Hi Ken,

Thanks for the post. I owned GENC for a few years before recently selling (at no appreciable gain or loss) based on the fact that the lop-sided ownership structure allows mgmt to continue to cash in with no incentive to unlock value for shareholders.

Do those types of voting/power imbalances ever scare you out of an investment?

Thanks,

Phil

jinraidx
Jinraidx - 3 years ago
There is a negative outlook for the firm.

If I remembered correctly, they operate on a contract basis and most are expiring soon with no view of renewal. But then again if the cash burn is manageable, then why not.
ken_hoang
Ken_hoang - 3 years ago
Phil, for Genc, it's the asset play, and for any asset play, it won't be a huge investment and you need to diversify. I personally do not care about the power imbalances in terms of voting. If the CEO/chairman owns too much stock, it might cause the power in his hand. But if he owns too little stock, it would make me think that he has no incentive to drive the company.

The asset still there, so investors should have much more patience, however, do not put a big chunk of portfolio in those asset play, still need the certain level of diversification.

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