Long Shot: Yearn for Highway Funding

 | Apr 19, 2012 | 12:00 PM EDT
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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


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