First, let’s start with a description. The company is mainly engaged in the HVAC business, but they also produce machines for metal companies and engage in architectural work. You can find a fuller description of the company and their offerings at their corporate website and company directory.
What’s interesting about this is all of those businesses is are quite tied to the housing market and economy. Thus, if the economy ever picks up, these businesses could see significant upside.
Before we start talking about how the businesses are performing, I want to go through the company’s corporate history (which, by the way, you can find in note 13 of their annual report).
In 2006, the company went private by engaging in a massive reverse split / forward split transaction. As part of the transaction, the company agreed to engage in a dutch auction to repurchase up to $2.5m of shares each year for the next five years. Thus, the Company completed their last required dutch auction in 2011.
These dutch auctions were so interesting because they were engaged in at a huge discount to book value and (as I’ll soon argue) it seems improbable the company is worth less than book. The going private also allowed the Chairman and CEO to take a super majority control of the shares, so his interests should be aligned with shareholders, though there is always the risk he starts robbing other shareholders who can’t effectively do anything about it! However, a (admittedly quick) review of their proxies from before they went “private” seems to reveal very reasonable compensation and mgmt more focused on building value than stealing it.
Finally, it should be noted the company closed some very unprofitable divisions in 2011. It looks like those divisions were masking the profitability of the remaining divisions. Once those divisions are back out, it looks like MCCK has been earning 5% after tax ROE throughout the crisis and is approaching 10% in the TTM. That’s a pretty impressive performance for a company levered to the construction market during that time frame.
So, all that said, let’s hit the company’s valuation.
Given the relatively decent performance through the crisis and the upside potential as the economy recovers, I think it’s reasonable to believe the company is at least worth book value. At their latest report, book value came in at $17.64 per share and tangible book at ~$14.70. (As a side note, the company has a rather strong balance sheet, with more cash than debt and a very low leverage ratio overall).
In terms of earnings, the company has earned $19.5m in operating income over the past year. The company’s current EV is ~$91m, giving them an EV / EBIT ratio of 4.8x. Trailing twelve months earnings per share comes in at $1.56, so the company is also trading at a rather reasonable 8x P/E (I much prefer EV / EBIT ratios over P/E, but some people do like that sort of thing!)
Lastly, it should be pointed out that Mestek has used the financial crisis to 1) shutter under-performing business units and 2) purchase small bolt-on acquisitions on the cheap. It’s hard to put a value on that, but it should pay dividends as the economy recovers.
So, all that said, I think Mestek is a pretty interesting investment at today’s prices. It’s cheap, it’s simple, and it has a good deal of upside as the economy recovers. All that said, I don’t currently have an investment simply because I believe there are stocks with similar or greater upside potential but firmer catalysts / more downside protection (for example, Reading (RDI)). But I will certainly be keeping an eye on the shares, and I think they’re certainly worth consideration at today’s prices.
Disclosure- long RDI, MRINA