Gencor: A Good Long Term Investment

If you need a sturdy road, Gencor (GENC) is your company. Gencor Industries designs and manufacture of heavy machinery used in the production of highway construction materials, synthetic fuels, and environmental control equipment. It produces hot-mix asphalt plants used in the production of asphalt paving materials; and related asphalt plant equipment, including hot mix storage silos, fabric filtration systems, cold feed bins, and other plant components. The company also manufactures combustion systems and soil decontamination machinery, as well as combustion systems for rotary dryers, kilns, fume and liquid incinerators, boilers, and tank heaters. In addition, it provides thermal fluid heat transfer systems to transfer heat for storage, heating, and pumping viscous materials, such as asphalt, chemicals, and heavy oils. Gencor Industries sells its products through sales representatives, independent dealers, and agents primarily to the highway construction industry worldwide.

Current position

The company has not seen new funds from the infrastructure plan due to delays, thus the company’s revenue and earnings have suffered. Also adding to the suffering is a freeze in capital equipment spending amid the recession. Investors have priced Gencor as if roads will never be built again. The US, with one of the worst road infrastructure quality among developed countries will surely start to build and improve roads again, surely this time with a vengeance stemming from the highway bill.

Accountability

Heavy insider ownership gives the management incentive to strongly improve the business. CEO E.J Elliott owns 13.2% of the shares outstanding, company president Marc G. Elliott owns 3.7% and director John E. Elliott owns 7.3%. Collectively all directors and executive officers own more than 15% of all the shares outstanding. Source: Gencor Industries proxy statement.

Value

The company has $6.33 per share in cash with no outstanding debt. The share price is currently at $6.86. This gives the company an operational value of $0.53 per share. The company is basically selling for free as cash per share is often the floor on a stock price (unless substantial losses such as lawsuits or one-offs are seen). The company has posted losses of $0.04 and $0.03 in Q1 and Q2, respectively. It may post another loss in Q3, however after the highway spending bills takes effect, the company should start to observe a substantial flow of capital from the measure. If we normalize the earnings at $0.70 per share annually, we get a forward PE of 9.8. If we take the value of the company’s operation side ($0.53 per share), we get an adjusted PE of only 0.76. That is a PE of less than 1! If we conservatively normalize annual earnings at $0.70 and take a hypothetical PE of 10, the company’s share price of operating business should be $7.00 (current price $6.86). If we further add the cash equivalents of $6.33, the company’s overall share price should conservatively should be $13.19 ($6.86+$6.33). When (not if) the company starts to receive highway road building funds, Gencor has vast potential to increase its earnings beyond the conservative levels. Given the Gencor’s excellent balance sheet with substantial cash and no debt, current low share price, and excellent prospects for road building, the company is clearly mispriced and presents a very attractive investment opportunity.

Catalyst

With president Obama’s recession stimulus plan centered on creating jobs by boosting the nation’s infrastructure, Gencor is potentially a large beneficiary. Combine this growth potential with its net cash position, the investor has a wide margin of safety and is getting the operating business of the company for almost free.

Disclosure: Long GENC

Comments

[ruteckig:]

but a 333 p/e?

Jul 30 10:03 PM

[bean:]

Actually the Elliott's own about 30% of the shares.I am not quite certain 70 cents is doable.The wild card is the cash and how much revenue and earnings can be added on with tuck in acquisitions.Highway bill is being delayed 18 months,Gencor's property is worth 10 million at least.

Jul 30 10:48 PM

[User 464052:]

I think it is important to understand that the management team is full if douche bags. ie the Elliotts

Jul 31 08:39 AM

[Pope Brar:]

If you normalize the earnings at $0.70 (very achievable as things are at worst due to lack of spending on infrastructure equipment) you get a PE of about 10. Current PE of 458 does not apply in more "normalized conditions". Take out the cash in the company and you get a PE of less than 1 for the operating business. The government and cities are simply not spending anything due to budget shortfalls around the country. Roads will have to be built eventually (just as we have to eventually eat after being hungry) as it's the primary focus of the Obama administration.


On Jul 30 10:03 PM ruteckig wrote:

> but a 333 p/e?

Aug 01 05:41 AM

[Pope Brar:]

If you normalize the earnings at $0.70 (very achievable as things are at worst due to lack of spending on infrastructure equipment) you get a PE of about 10. Current PE of 458 does not apply in more "normalized conditions". Take out the cash in the company and you get a PE of less than 1 for the operating business. The government and cities are simply not spending anything due to budget shortfalls around the country. Roads will have to be built eventually (just as we have to eventually eat after being hungry) as it's the primary focus of the Obama administration.


On Jul 30 10:03 PM ruteckig wrote:

> but a 333 p/e?

Aug 01 05:42 AM