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Gencor ($GENC) – A Free Business with a Huge Portfolio

December 22, 2011 | About:
whopper investments

whopper investments

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Gencor (GENC) is a business that I think is more than interesting at these prices. In many ways, it reminds me of Warren Buffett’s investment in Sanborn Maps in the 60s, where the company is trading at a discount to its massive investment portfolio and the business is being thrown in for free. In many ways, this is also similar to another current holding of mine, TSR Inc. (TSRI), a stock that trades for less than the value of its cash.

Anyway, on to the company. Gencor has quite an interesting history, including a bankruptcy at the beginning of the decade caused by too much debt from bad acquisitions. The company came through the bankruptcy by selling under-performing divisions and quickly paid off creditors at 100% without diluting equity holders. If you had researched the company then and figured out the equity was money good, you’d be up huge. The stock traded under $1.00 for over a year at the turn of the century as the bankruptcy proceedings dragged on. Even given it’s recent pull back, you’d be up over 7x in ~10 years. Not bad.

Today, the company operates solely as a manufacturer of heavy machinery used to make highways, but the bankruptcy is an important thing to keep in the back of your mind. The business is, to be honest, not a good one. Uncertainity in the highway spending bill is hurting them, the business is cyclical and a bit capital intensive, and even at the top of cycles it barely earns above average returns.

However, what makes GENC interesting is during the middle of the decade the company had a “second” business- they were minority owner of a very, very profitable venture that they had invested in just before their bankruptcy. This venture, now wound up, generated significant cash flow for GENC. All told, it sent them just under $110m in pretax cash flow from fiscal 2003 to 2008. Given that they were just coming off a liquidity driven, you can probably guess what they did- they kept it all on the balance sheet in cash and marketables.

Today, the cash and the marketables continue to sit on the balance sheet. At their most recent 10-k, they had over $74m in total, made up of ~1/3 equity and 2/3 cash + bonds. Given total assets of under $105m and annual revenues under $60m, at this point, a purchase of GENC really doesn’t represent a business with a significant cash balance. Instead, the investments has grown so large that today’s purchases represents the portion of an investment portfolio with an operating business on the side.

So let’s start thinking about valuing Gencor. Cash and investments come in at $74m, or $9.25 per share, versus no debt. The company says they are saving this cash to do an acquisition. If so, you may want to assign a discount to the cash (especially given some poor acquisitions in the 90s given the limited data I can see)… but since they’ve let this cash build up for almost ten years, it doesn’t seem an acquisitions coming.

Then you turn to the core business. Again, it’s not a great business…. but it’s not terrible. I think book value should likely approximate worth. Their assets excluding investments.are on the books for ~$30m, which comes out to just under $25m after subtracting the $5.5m in total liabilities. This would work out to a business value of ~$3 per share. Maybe you want to discount it a little because the business is a bit cyclical.

However, I have reason to suspect book value dramatically understates the value of the equipment GENC uses. I think they intentionally over state expense like depreciation and reserves to minimize taxes. As an example, they have LIFO reserves of $4.4m on their inventory… but their inventory is only worth $12.9m!!! That’s a pretty huge reserve. Similarly, their PPE is on the books for just over $8m, but the company notes that they have $10.3m of fully depreciated PPE (in other words, PPE that is on the books for nothing) that is still in service. I’m not going to make an adjustment for either of these, but it’s nice to know that extra margin of safety in asset terms is there (also, important to remember that the company might be overstating expenses to understate earnings and reduce taxes).

I think at today’s price<$7, you’re investing in Gencor with a huge margin of safety. You’re buying a seemingly very conservative investment portfolio at a ~25% discount and grabbing the operating business for free. There are some corporate governance concerns, as management is entrenched through a share structure similar to the one we saw recently at CCA. But management also owns a huge amount of the company (~33%), so you’d hope their interests are relatively aligned with shareholders. You’d also like to see the company do something with their cash, preferably a share buy back at today’s levels. But overall, I think there’s plenty of asset protection to more than justify an investment at today’s levels.

P.S. You can find a much more negative analysis of Gencor at oddballstocks and STreport. Needless to say, I don’t agree with them on their negativity on the company, though I think their analysis is thorough and spot on. As an example, some of their concerns relate to accounts receivable and how they bill customers. Accounts receivable and costs in excess of billing represent ~$6m of their almost $105m balance sheet. Given annual revenues of $60m, these accounts are turning over 10x per year, or almost every month. Even if these accounts were completely worthless, it would barely dent my margin of safety here.

Disclosure- Long GENC and TSRI

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Rating: 3.1/5 (10 votes)

Comments

jstgeme
Jstgeme - 2 years ago
You seem to be using the incorrect number of outstanding shares in your analysis (unless I'm just using more current numbers)? $74 million / $9.5 million shares outstanding equals roughly $7.80, not $9.25

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