Gencor Industries (GENC US) $9.41
This is a follow up to my initial piece on Net Nets (http://www.stockopedia.com/content/on-ben-grahams-...) where I mentioned Gencor (GENC US) and follows on from Rupert Hargraves's analysis of “Three Buffet Style Cigar Butt Bargains" on 14/11/2014.
Gencor is a net net for the following reason:
Net Current Asset Value (NCAV)
Cash on B/S: $87.1m
Accounts Receivable minus creditors & customer deposits & Accrued expenses : -$1.5m
Inventories: $13.7m (but lets discount these by 30% for safety = $9.5m)
Long term and short term debt: $0m
Net Current Asset Value (NCAV) $95m
Net Asset Value
Same as above, but add on value of property which is owned : $7.1m (this is for 2 offices / manufacturing facilities in Marquette, Iowa for a 137k sq ft facility and 72 acres and in Orlando, Florida for 215k sq ft facility and 27 acres of land).
Total Net Asset Value: $103m
Shares in Issue: 8m (plus a few options)
Share Price: $9.4
Mkt Cap: $75m
Valuation
0.78x NCAV
0.72x NAV
0.64x stated Tangible Book Value
Thoughts on the valuation
Cash on the balance sheet accounts for more than the current
market cap alone, before we factor in the value of inventories. But the Group
also has a breakeven(ish) design / manufacturing operation for asphalt plants.
This is definitely worth something in my view
Lets dig into this further
The Operating Business
Gencor Industries “designs, manufactures and sells machinery
and related equipment used primarily for the production of asphalt and highway
construction materials. The Company's principal core products include asphalt
plants, combustion systems and fluid heat transfer systems." (Annual Report,
2014)
First off lets be very clear. Gencor Industries is NOT a good business as defined by most classical definitions of good businesses eg High return on Capital Employed (ROCE). ROCE is poor and inconsistent. Looking back over the last 10 years the Gross Margins have oscillated between a low of 15.8% in 2011 and a high of 26.4% in 2007. These are low GMs and give little protection if trading disappoints. Its an unfair comparison but look at Aggreko which designs and assembles generators: Gross margins >60%. A high quality business.
My first observation is that this implies that Gencor operates in a highly competitive, fragmented industry, with low barriers to entry. Consequently I assume it has little or no pricing power, which is why GMS are low and show considerable variability. Steel is a major raw material and the volatility…
