Gencor has current assets of 100m (of which 70m are highly liquid) and total liabilities of 15m. Mr. Market offers us the company for 75m.
After paying down all debt, the investor gets the fixed assets with a book value of about 10m for free. The investor pays nothing for the patents. Liquid assets consist mainly of a growing portfolio of muni bonds. Fixed assets consist mainly of 100 acres of land with 350 000 sq. ft. of offices and manufacturing facilities. This company is worth at least 100m.
Most of these numbers can be found in the 10q for the quarter ended march 31 2010. Numbers have been rounded to accommodate for the innumeracy of the author.
The opportunity exists because
A) The current outlook for infrastructure spending is not good.
B) Recent pre-tax earnings are (barely) negative.
C) It is unclear what management plans to do with the mountain of excess liquid assets that have been on the balance sheet since 2005.
D) The Company’s officers and directors own almost all of the Company’s Class B stock and are entitled to elect 75% of the members of its Board of Directors. This concentration may have the effect of delaying or preventing a change in control.
a) IMO the USA can postpone maintenance of its roads but it is unlikely to do so indefinately.
b) This is a cyclical company with an overcapitalized balance sheet. They are running a tight ship (not bleeding money in bad times) and should be well positioned to earn good profits if the cycle ever turns. Gencor has seen revenues fall from $ 90m to $ 55m. This has led to a reduction in the bottom line from a gain of $15m to a loss of $2.5m while consistently spending 2.5m annually on R&D.
c) The company intends to evaluate the acquisition of other companies and assets that would complement or expand the Company’s existing businesses or broaden its customer relationships. Although it is unclear if acquisitions (if any) will be in the best interest of shareholders, it is clear that management has a good long-term record. Management has increased book value per share at more than 20% since 2000. The only down year has been 2009. The company sells for .8 x book.
d) The company is controlled by the Elliot family. Now that would be a bad thing if it were badly managed. I have found no evidence that management is overpaying itself or siphoning off cash. Were I to own all shares, I would not be able to find better managers for this company.
Common stock and Class B shareholders have equal rights with respect to dividends, preferences, and rights, including rights in liquidation.
Assets are a good starting point to look for downside protection but a company will go bankrupt if it runs out of cash.
Simply put, the income from the portfolio of muni-bonds, will drag the company through any prolonged cyclical downturn in roadbuilding imaginable. The company has clearly demonstrated it can weather cyclical downturns without destroying shareholder value.
In the mean time, the company consistently spends a significant ammount on R&D. This IMO is crucial to maintain a competitive advantage in this industry.
Total compensation for key executives as a group is less than 3m of which 1.2m is for Elliot jr & sr. Elliot jr. has been with the company since the mid ninetees; he is the CEO. Elliot sr. has been making asphalt at Gencor since anyone cares to remember.
Gencor has the risks of any manufacturer of capital equipment
- It has no clear barriers to entry
- The business is seasonal as well as cyclical
- The interest of the Elliot family may not be aligned with the interest of other stockholders.
- EDIT the company is now on its third CFO in two years.
- the 198 other risks I have not thought of yet.
Upon analysis, the common stock of Gencor promises safety of principal and a satisfactory return.
- EDIT - Saj Karsan wrote an article on GENC earlier this year: [www.gurufocus.com]
Any and all questions welcome as usual.