Long Shot: Yearn for Highway Funding

 | Apr 19, 2012 | 12:00 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

genc

Real Money's Long Shot column is dedicated to trading ideas that are highly risky, but which present an opportunity for significant payoff if they work. Such ideas are sometimes characterized as "lottery tickets" and are for only the most risk-tolerant investors, as the potential for 100% loss is high.

This Long Shot write-up is simple and straightforward: The payoff is a function of whether the U.S. will ever again get a law for long-term federal highway construction spending.

Gencor Industries (GENC) is a Florida-based manufacturer of heavy machinery used for the production of highway-construction materials. Specifically, the company claims to be the nation's leading manufacturer of asphalt plants. In addition, it manufactures soil-remediation plants and combustion systems used by the highway-construction industry. The company operates out of three state-of-the-art plants that service North America, Europe, Asia and the Middle East.

The last major highway-spending bill, formally known as SAFETEA-LU, was a $286 billion measure signed by George W. Bush that expired in 2009. Since then, the road-building industry has operated under numerous short-term extensions to the bill that have been geared more toward providing a shot of stimulus, as opposed to providing a long-term federal highway spending program.

Given the current congressional deadlock as far as government spending is concerned, it's no surprise that no new highway-spending bill has been passed. At the very least, I wouldn't expect one until after this year's election, and even then there would be no guarantees as to when it would emerge, nor as to how large it would be. For what it's worth, Congress is expected to begin working on a replacement bill for the next six-year period this year.

Gencor, as with other businesses in infrastructure construction, relies heavily on long-term highway construction bills. Without such a bill, no major road projects will get off the ground -- so Gencor's customers will naturally hesitate to invest in new equipment. As a result, business moves at snail's pace.

As for Gencor's more positive points, while this company has market capitalization of just $66 million, it carries no debt and $78 million in cash. Total liabilities are less than $8 million. In other words, against a stock price of $6.60, cash per share equals $8.20, and tangible equity per share comes to approximately $10.40. Gencor is what value investor Ben Graham called a "net-net": That is, the value of net current assets exceed the current valuation. Also, in the past five years, equity has actually increased, from $83 million back then to nearly $100 million today.

But the market is giving this business away because of the uncertainty over future highway spending -- and, indeed, Gencor has reported operating losses every year since SAFETEA-LU expired in 2009, whereas operating income exceeded $6 million each year in 2006 and 2007. In two of the three years since SAFETEA-LU expired, the company actually generated a profit because of its $70 million marketable-securities portfolio. Still, a new spending bill is what the company needs. A federal highway is something both parties may be liable to support -- and, if and when a new one is passed, names like Gencor will see their share prices advance quickly. It's just not going to happen in an election year.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider GENC to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices

________

Editor's Links

More Long Shot ideas:

Columnist Conversations

Please pay special attention to Monitise update in my Diary.
Lang:
Many are seeing the mind-boggling move here again TWTR. Not too surprising, as the technicals have been quite...
I bought shares of IT provider Cognizant Technologies (CTSH) this morning on weakness in the low $45's. CTSH'...
This morning your shares of Bluetooth and other connectivity chip company CSR plc (CSRE) have jumped...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.