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The road to profits is paved - Gencor Industries Inc.

Gencor manufactures hot-mix asphalt plants used in the production of paving materials. The Company’s H&B product line was first manufactured in 1894. The Company’s subsidiary, Bituma Corporation, formerly known as Boeing Construction Company, developed the continuous process for asphalt production, which has been adopted as the United States industry’s standard technology. The Company also manufactures a comprehensive range of mobile batch plants, soil remediation machinery, kilns, incinerators, thermal fluid heat transfer systems and specialty storage tanks for a wide array of industry uses.The machinery, manufactured in the US, is sold throughout the world.


Investment thesis

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.


Earnings power

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.


Management

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.


Risks

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.


Conclusion

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: http://www.gurufocus.com/news.php?id=86359

Any and all questions welcome as usual.

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 3.4/5 (16 votes)

Comments

richday101
Richday101 premium member - 4 years ago
Book value going up over the last 10 years but revenue and earnings don't seem to be keeping pace. FCF is worse and negative in most years. I think this is a safe investment (won't drop too much in price) but I'm not convinced there is any growth (eps, cf, etc.) and hence price appreciation.
batbeer2
Batbeer2 premium member - 4 years ago
Fair enough.... there is no indication in the numbers that earnings will grow... however, I think of the earnings statement as a derivative of book value.

In essence, the earnings statement is the difference between two balance sheets over a given period. Now I know anyone with a little bit of accounting knowledge will have a lot to say about that but if the trend of tangible book value is good and the earnings trend is bad, I would be inclined to believe the book.

Another way to put it is like this:

To estimate IV, given the choice between a series of balance sheets or a series of detailed earnings statements. I would choose the balance sheets in a heartbeat.

Imagine you have to compete against GENC in the asphalt plant business.... would you attempt this ? Think about the implications of that.
GigaBubble
GigaBubble - 4 years ago
But didn't one of this forum's most esteemed professional expert, HW Schacht, just wrote that Gencor could go bankrupt: http://www.gurufocus.com/forum/read.php?2,60836,60987#msg-60987

batbeer2
Batbeer2 premium member - 4 years ago
Oh about FCF....

They have been putting a lot of cash into the investment portfolio, Sites like Gurufocus and Morningstar deduct those "donations" from cash from operations. Add that back and you may find the FCF picture somewhat different.

From an owners perspecive, "donations" to the investment portfolio are not capex.
batbeer2
Batbeer2 premium member - 4 years ago
GigaBubble: But didn't one of this forum's most esteemed professional expert, HW Schacht, just wrote that Gencor could go bankrupt: [www.gurufocus.com]

I missed that, or I would have linked to it. I enjoy reading anything mr. Schacht writes, but I do not always agree. The link you posted leads me to a Forest thread....

Is there an old thread on Gencor ?

- EDIT -

Found it... Say Karsan beat me to it. http://www.gurufocus.com/news.php?id=86359
richday101
Richday101 premium member - 4 years ago
I think GigaBubble is [font= Tahoma, Arial" size="3]referring to the following statement in the FRX thread written by Mr. Schacht on GE.[/font]

"Thanks Buffetteer for the follow-up. You are more confident in GE Capital than I am. If not for government money, I think GE would be bankrupt. We'll agree to disagree here, but certainly JNJ is compelling if your valuation is correct."
richday101
Richday101 premium member - 4 years ago
This should have read: I think GigaBubble is referring to the following statement in the FRX thread written by Mr. Schacht on GE...
batbeer2
Batbeer2 premium member - 4 years ago
Ah! GENC, GE

Yes, I see how one could get those mixed up :o)

GigaBubble
GigaBubble - 4 years ago
"It is a disservice to FRX to put it in the same company as JNJ and GE where valuation is concerned. JNJ is fairly valued and GE is overvalued.

The question is, why would I mess with CFK when I can buy FRX at current levels?

And GENC may be bankrupt before infrastructure spending reaches them. CAT and MTW will survive, but neither is undervalued."
There are unique elements to GENC ownership, and changes in CFO, etc. that warrants deeper investigation into what exactly HWSchacht meant. How exactly are the "cash" held? Why are they holding so much cash? Deworsifications? Who is Sherry?

batbeer2
Batbeer2 premium member - 4 years ago
Ah !

Calling mr. Schacht...... come in mr Schacht......

As for diworsification, that is indeed a problem. With a very high (normalised) ROE & ROA on an overcapitalised balance sheet, almost any acquisition would worsify GENC. How many businesses do you know that have an average ROE like GENC while holding so much excess capital ?

If they are not willing to deworsify, it could take a very long time before they get a good opportunity. Having said that, the best business for them to invest in would be their own. A share buy-back. I guess that would further reduce stock liquidity to the point where they would want to delist.

In short, there are two ways to look at the fact that they heve been sitting on a mountain of cash for years now.
brar951
Brar951 - 4 years ago


Batbeer, I also wrote an article on Gencor about a year ago on Seeking Alpha. It's a cyclical business that is eventually due for a comeback. Roads need to be maintained and built. Here is my article:

Gencor: A good long term investment

If you need a sturdy road, Gencor (GENC) is your company. Gencor Industries designs and manufacture of heavy machinery used in the production of highway construction materials, synthetic fuels, and environmental control equipment. It produces hot-mix asphalt plants used in the production of asphalt paving materials; and related asphalt plant equipment, including hot mix storage silos, fabric filtration systems, cold feed bins, and other plant components. The company also manufactures combustion systems and soil decontamination machinery, as well as combustion systems for rotary dryers, kilns, fume and liquid incinerators, boilers, and tank heaters. In addition, it provides thermal fluid heat transfer systems to transfer heat for storage, heating, and pumping viscous materials, such as asphalt, chemicals, and heavy oils. Gencor Industries sells its products through sales representatives, independent dealers, and agents primarily to the highway construction industry worldwide.

Current position

The company has not seen new funds from the infrastructure plan due to delays, thus the company’s revenue and earnings have suffered. Also adding to the suffering is a freeze in capital equipment spending amid the recession. Investors have priced Gencor as if roads will never be built again. The US, with one of the worst road infrastructure quality among developed countries will surely start to build and improve roads again, surely this time with a vengeance stemming from the highway bill.

Accountability

Heavy insider ownership gives the management incentive to strongly improve the business. CEO E.J Elliott owns 13.2% of the shares outstanding, company president Marc G. Elliott owns 3.7% and director John E. Elliott owns 7.3%. Collectively all directors and executive officers own more than 15% of all the shares outstanding. Source: Gencor Industries proxy statement.

Value

The company has $6.33 per share in cash with no outstanding debt. The share price is currently at $6.86. This gives the company an operational value of $0.53 per share. The company is basically selling for free as cash per share is often the floor on a stock price (unless substantial losses such as lawsuits or one-offs are seen). The company has posted losses of $0.04 and $0.03 in Q1 and Q2, respectively. It may post another loss in Q3, however after the highway spending bills takes effect, the company should start to observe a substantial flow of capital from the measure. If we normalize the earnings at $0.70 per share annually, we get a forward PE of 9.8. If we take the value of the company’s operation side ($0.53 per share), we get an adjusted PE of only 0.76. That is a PE of less than 1! If we conservatively normalize annual earnings at $0.70 and take a hypothetical PE of 10, the company’s share price of operating business should be $7.00 (current price $6.86). If we further add the cash equivalents of $6.33, the company’s overall share price should conservatively should be $13.19 ($6.86+$6.33). When (not if) the company starts to receive highway road building funds, Gencor has vast potential to increase its earnings beyond the conservative levels. Given the Gencor’s excellent balance sheet with substantial cash and no debt, current low share price, and excellent prospects for road building, the company is clearly mispriced and presents a very attractive investment opportunity.

Catalyst

With president Obama’s recession stimulus plan centered on creating jobs by boosting the nation’s infrastructure, Gencor is potentially a large beneficiary. Combine this growth potential with its net cash position, the investor has a wide margin of safety and is getting the operating business of the company for almost free.

GigaBubble
GigaBubble - 4 years ago
Could you offer more details on the failed takeover attempt by the Elliotts. Would they likely try again? Who is Sherry Houtkin and how influential can she be? Thanks.
batbeer2
Batbeer2 premium member - 4 years ago
Thanks for your questions.

Would they likely try again?

I'm affraid I have little of value to add on the likelihood of this.

Who is Sherry Houtkin and how influential can she be?

As a Result of the death of Harvey Houtkin in 2008, beneficial ownership of some 2m common shares passed on to Sherry Houtkin (Mr. Houtkin's spouse). This is the COMMON stock without the super voting rights. mr. Houtkin held those shares for more than 20 years.

With some 8m commons outstanding... whatever she does with those shares or whatever deal she may make with GENC of any other party to offload those shares, is probably good news.
GigaBubble
GigaBubble - 4 years ago
Harry or Harvey?

http://www.wiley.com/WileyCDA/WileyTitle/productCd-047026067X,descCd-tableOfContents.html

BTW, Harvey Houtkin was a grand-daddy of day-trading ...

batbeer2
Batbeer2 premium member - 4 years ago
@Brar951

Thanks for sharing. I was not aware of your article. As always, the cycle takes more time to turn than one would expect.

@GigaBubble... typo fixed. Should have read "Harvey".
brar951
Brar951 - 4 years ago
@Batbeer2

First priority for Obama admin was the healthcare bill, now comes the highway bill. It's imminent, I expect it later this year. Hold on a little further, it's coming.
GigaBubble
GigaBubble - 4 years ago
CFO turnover?
batbeer2
Batbeer2 premium member - 4 years ago
>> - EDIT the company is now on its third CFO in two years.

I looked into the matter and found out that the CFO who left so quickly landed a job as a consultant in some sexy services company. I forgot the name but you can find him/it if you take the trouble. The timeline suggests to me that he had two options for a new job and chose the other one (closer to home) after all...

Still I would rather not see high turnover in this position. At the very least it means they are not capable of picking the perfect guy for the job.

Harvey Houtkin wrote a nice book on investing. There is a bull case for Gencor in that book. http://www.flipkart.com/wall-street-buried-treasure-harvey-book-047026067x


Why are they holding so much cash? Deworsifications?

These guys have been good capital allocators for decades. Hoarding the cash is an indication they are NOT going to deworsify.

batbeer2
Batbeer2 premium member - 3 years ago
First priority for Obama admin was the healthcare bill, now comes the highway bill. It's imminent, I expect it later this year. Hold on a little further, it's coming.

Anyone have thoughts on the impact of the recently announced plans on the value of the company ?

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