Today I want to highlight a company that might end up being a beneficiary of the new Jobs bill and the associated infrastructure spending, should it pass. Even if it doesn’t the company is still deeply undervalued based on its current business and assets.
Gencor Industries (GENC) is a diversified, heavy machinery manufacturer for the production of highway construction materials, synthetic fuels and environmental control machinery and equipment used in a variety of applications. The Company’s core products include asphalt plants, combustion systems and fluid heat transfer systems. The Company’s products are manufactured in two facilities in the United States. The company is headquartered in Orlando FL and was originally known as Mechtron International Corporation prior to 1987.
Why is Gencor Undervalued?
Here are some metrics for Gencor, based off the closing price of $7.39/share on Sep 14, 2011.
|Market Value||70.3528||PE Ratio||10.40845|
|Cash & Marketable Securities||83.07||Cash/Market Value||1.180763|
|Long Term Debt||0||P/Book||0.681845|
|Short Term Debt||0||P/NCAV||0.74079|
|Current Ratio||10.71298||Profit Margin (ttm)||12%|
Please note that the Cash and Market Value numbers are in $million.
For a company with no short term or long term debt, and a 12% net profit margin in the last 12 reported months, it is quite surprising that the market is only valuing the company at $70 million. Gencor’s liquid cash and marketable securities itself is $83 million. As if to emphasize the tremendous amount of liquid assets it holds, its current ratio is touching 11, which is quite high. This means that it has about 11 times more cash and other liquid assets (Receivables, inventory, etc) than its current liabilities (payables). Generally I find a current ratio of 2-3 quite healthy.
Its PE ratio is 10.41. Normally I would adjust the cash out from the market value and recalculate the PE ratio with an assumption that the company could pay out the excess cash in dividends to its shareholders in a way that does not impact its future earnings capacity. In this situation though, with cash being more than the market value, it does not make sense to calculate an adjusted PE ratio. The company can, if it chooses, return its entire market value to its shareholders and will have enough working capital left in the business to not change a thing in its operation.
Where is Gencor’s Cash?
Bulk of Gencor’s cash is invested in equities and mutual funds. The current 10-Q gives a break down of how its cash is invested.
|Fair Value Measurements|
|Level 1||Level 2||Level 3||Total|
Cash & Money Funds
Here Level 1 means that the valuation for those particular investments are based upon the market quotes. Level 2 means that the valuations have been computed based on standard valuation techniques. For bonds, these techniques are pretty straightforward and do not leave much room for error. The company seems to be emphasizing safety of principal in its investments given the high share of investments in municipal bonds and is not necessarily parking its cash in these investments as a way of earning a good return (which is might as well, given how the market has performed in the last year or so).
Why Does Gencor have so much Cash?
Why would any company hoard cash and not use it to, say make acquisitions? One clear reason is that the company is uncertain about the oil prices. Gencor’s business is very sensitive to oil prices and it is not confident that in the current economic environment the increased costs could be passed on to its customers completely. Therefore, it maintains a cushion. Another reason is the uncertainty about the infrastructure spending in the US. If its business grows with new infrastructure spending, it will have the capital necessary to expand. With the level of US government debt, and more stimulus and Quantative Easing expected, it is prudent to expect the oil prices to rise.
Intrinsic Value of Gencor
The company can return $70 million in cash and still be valued at 10 times its earnings. This means that the company is worth $14 – $15 per share or double today’s price. At the current prices, Gencor’s shares represent a deep value in the market.
Recommendation: Buy Gencor stock upto $10.5/share. This gives close to 30% margin of safety which should be enough.