Gencor Is a Good Road to Follow

 | Nov 27, 2013 | 11:00 AM EST  | Comments
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liwa

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aste

I screen the universe of stocks regularly for names trading at, near or even below the cash on the balance sheet. This is the oldest trick in the book, and in an efficient market you should not be able to find good businesses with zero value assigned to the business.

This is true most of the time, as most companies trading below cash are burning through it. Or, they have other problems that the market believes is going to impair value. Sometimes the company is really good but is a member of a tainted group; this was the situation with Lihua International (LIWA), a rapidly expanding "industrial growth" name that is trading at cash because it is Chinese. I profiled LIWA this summer and am still excited about the name. One reason I trust their numbers is the outstanding chief financial officer, who I know and respect. Another is the long history of operations with not the slightest indication of any issues.

Running my screen during this slow holiday week turned up another hidden gem that I am very excited about: Gencor Industries (GENC). Gencor is small at an $86 million market cap, yet the $90 million of cash and liquid investments on the balance sheet give me great comfort that I am taking little risk in buying this stock.

Gencor was founded in 1968, and is based in Orlando, Fla. The company makes machinery equipment used in road construction, mostly related to asphalt production.

As they describe it: "The company offers hot-mix asphalt plants to produce asphalt paving materials; related asphalt plant equipment, including hot mix storage silos, fabric filtration systems, cold feed bins, and other plant components; and a range of mobile batch plants and trommel screens." They also make related equipment for soil remediation, pumps, and industrial storage tanks, among other things.

In contrast to the many cash-burning entities I mentioned earlier, Gencor is running in the black. The last three years have been profitable as well as two of the three quarters of this fiscal year, which ended September 30. (The company reports fourth quarter and FY2013 results on December 9.)

Because of the seasonality of road-building, the September quarter is often slow and they often book a loss. They lost $361,000 last year on $14 million in revenue. I expect a loss when they report on the 9th, but they should be able to maintain full- year profitability.

While growth is good, if not spectacular for GENC, the cyclical nature of the business certain argues for a discounted multiple. Revenue is likely to be down around 20% this year as federal and state highway projects have slowed. However, the company should be able to sustain margins in this down cycle. Road building will rebound eventually because of the inevitable need for repairs.

Simple quantitative analysis would indicate deceptively that GENC is fairly valued. There are not many comps, but one is Astec Industries (ASTE), which is 10 times the size with similar margins and trailing profit-to-earnings ratio.

So perusing this table might deceive you into thinking GENC is fully valued.

The balance sheet is the difference. The company has no debt, and $90 million of investments.

As they describe it: "As of June 30, 2013, the company had $8,491,000 in operating cash, and $82,023,000 in its investment portfolio, including $13,726,000 in equities, $26,384,000 in mutual funds, $18,632,000 in municipal bonds, $15,821,000 in corporate bonds, $5,394,000 in exchange traded funds and $2,066,000 in cash and money funds."

The investment portfolio is managed by a global investment management firm. The securities in the portfolio may be liquidated into cash at any time. Obviously, these instruments can fluctuate in value, but the portfolio seems reasonably diversified and would probably not be subject to more than 10% to 20% variance in either direction.

Why is the market missing this one? I am trying to figure that out myself. They seem to make no effort at investor relations. There is no analyst coverage, and the only press releases are the earnings releases. There is high insider ownership --meaning a low float -- which hurts trading but is welcome when management "eats its own cooking". Insiders own 40%, and the only major active institutional investor appears to be Fidelity, which owns 5%.

The risk/reward here seems compelling. When I buy the stock, I am buying a portfolio of liquid investments with a call option on a nearly 45-year-old business that is profitable, has earnings from operations not the portfolio, has a committed management team and exposure to an industry whose long-term viability is not in doubt and True, the stock is at a multi-year high. But with a business valuation of zero my odds of making money seem reasonable.

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