Three Buffett Style Cigar Butt Bargains

Following my recent article on how Warren Buffett’s early investments helped to transform him into an investing guru, I thought it would be a great idea to use some of Stockopedia’s own value screens to search for Buffett-esque investments in today’s market.   

Buffett began his career as a deep value investor, searching for stocks selling below their intrinsic value according to the criteria of his mentor Benjamin Graham. He called these bargains ‘cigar butts’... explaining: “A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit.”

A word of warning... the following ideas are highly illiquid small-caps, certainly not for widows and orphans. Additional research is definitely required before making any investment decision.

Seeking a catalyst

Gencor Industries Inc qualifies for the Benjamin Graham Net Nets Screen, the Negative Enterprise Value Screen and the Benjamin Graham NCAV Bargain Screen, so the numbers clearly stack up.

Gencor is a U.S. based company, which manufactures heavy machinery used in the production of highway construction materials. At the end of the second quarter, Gencor had $97.3m of cash and total liabilities of $5m. Shareholder equity totalled $115m, or around $12 per share (price to tangible book 0.8).

Gencor's performance has been dismal over the past six years. Sales have fallen at a compounded annual rate of 11.1% and net profit has fallen at a CAGR of 15.1%.

Its poor performance can be blamed on the U.S. federal government. All road projects within the U.S. are funded by the Federal Highway Trust Fund, which narrowly avoided bankruptcy this summer and is already in trouble again.

Of course, this has put the brakes on many road repair and highway construction projects. But at some point the Federal government will have to face up reality and infuse the fund with cash, which is likely to be the catalyst that restarts Gencor’s growth.

Unfortunately, until then the company is going to struggle to drive organic growth. Management is well aware of this, so they are looking for bolt-on strategic acquisitions to boost revenue and profitability. With many of Gencor’s peers also struggling, there are some bargains out there that could be snapped up with Gencor’s impressive cash balance.

Further, as business has slowed over the past five years, Gencor’s management has been restructuring to cut costs. It has been free cash flow positive for the past two years and while profit has fallen below historic levels, the group remains profitable and is still achieving positive, but not leading, quality metrics.

Overall, Gencor is a company trading below book, generating cash but waiting for a catalyst.

European value

As reported by the Financial Times earlier this week, around one in three companies in Europe are trading below their liquidation value, making Europe the ideal hunting ground for value seekers.

One such opportunity is Gevelot SA, a French company that produces industrial equipment. Like many European companies, Gevelot has suffered over the past five years. Revenue has declined 1.6% since 2008 and the company has been unable to turn a consistent profit.

Gevelot SA qualifies for the Trading below Cash Screen, the Negative Enterprise Value Screen and the Benjamin Graham NCAV Bargain Screen.

This year Gevelot raised €62.8m from the sale of its minority interest in the Canadian firm, KUDU Industries Inc. Gevelot’s net profit for the first half of this year came in at €59m, after adjusting for this one-off gain. Net profit from continuing operations was €2.9m for the same period.  

After this cash infusion Gevelot is trading significantly below the value of cash on its balance sheet. At the end of the first half the group had €146.4m in cash and short-term investments and €126.1m in liabilities. Shareholder equity at the end of the period amounted to €190m. With just under 1m shares in issue, book value currently stands at €211m per share -- 93.6% above current levels.

To unlock value, Gevelot’s management is considering share repurchases as a way of returning cash to investors. A word of warning, Gevelot is a high illiquid investment with an average daily trading volume of only 152 shares.

Greek construction

Another cash-rich undervalued European play is Metal Constructions Of Greece SA. Metal Constructions qualifies for nine of Stockopedia’s value screens and it’s easy to see why. The company is cash rich, trades below book value and has grown earnings per share at a CAGR of 17.2% since 2008, despite the economic headwinds facing Greece and the Eurozone in general.

Metal Constructions manufactures components for the international renewable energy industry as well as equipment for the international defence industry. International exposure has allowed the company to work around European economic headwinds.

At present, the company has a StockRank of of 97, lead by a high Value (99) and Quality (86) rank. Its quality metrics are some of the best on the market and analysts have been consistently raising earnings estimates for the company all year.

Despite the company’s growth over the past five years, Metal Constructions’ P/E is one of the cheapest in the market (357th out of 6369 companies). It supports a 5% dividend yield and trades at 0.97 of tangible book. EV/EBITDA is a lowly 1.6 compared to the market average of 11.3.

Bonus: A speculative play

One company that caught my attention while writing this article was Flour Mills Kepenos SA, a Greek, highly illiquid micro-cap (£8.4m mkt cap.). While the company looks attractive at first glance, there’s little in the way of additional information available on the company, unless you speak Greek. There’s definitely a need for further research.

Still, the company has a StockRank of 97, lead by a high Value (99) and Quality (91) rank. It has net gearing of 50.2%, interest costs are covered 5.4 times and Flour Mills has a quick ratio of 2.7 times. Net profit has expanded at a CAGR of 20% for the past six years, while revenue has fallen at a CAGR of 4%. The company also looks cheap on many metrics:

Conclusion

Hopefully, this brief analysis of three Buffett style value plays and one bonus speculative play, will give you some ideas to research further.  It’s worth remembering Buffett’s wise words “In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen.”. The information given here is intended to act as a starting point for further research and you should always do your own research before initiating a position. And of course, if you have any ideas or reflections on the above information, the StockRanks or informative insights, please leave a comment below.

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