Conrad Industries Inc. (OTCPK:CNRD) isn't quite as undervalued as it was a year ago when it traded for under $25.00 per share, but the stock's 80% rise still hasn't quite provided it with a fair valuation by many accounts. With a price-earnings ratio around 8.9x and a 17.38% CAGR in net income, the stock appears to be trading at a significant discount given its robust historic growth and future prospects.
On March 31, 2014, the company disclosed 2013 revenues of $303.3 million, net income of $28.6 million, EBITDA of $48.9 million, and diluted EPS of $4.80. These results were driven by an increase in customers from 176 to 182. Looking ahead, the company's backlog expanded 27% to $152.9 million, suggesting that its end market remain very robust and plenty of growth potential remains in 2014.
In a further vote of confidence, the Board of Directors declared a special dividend of $2.00 per share in December 2013 totaling $11.9 million and increased its stock buyback program to $10 million in February of 2013. These efforts aren't surprising given that the Conrad family and related parties own about 44.6% of all outstanding shares, encouraging them to unlock as much value as possible.
Calculating a Fair Valuation
Conrad Industries trades with a price-earnings ratio of around 8.9x compared to an industry average 22.7x and the S&P 500's 17.9x average, according to Morningstar data. While its price-earnings multiple is above its own 5-year average of 5x, the company's 17.38% CAGR in net income over the past five years suggests that a fair price-earnings multiple may be closer to 17x, assuming a PEG of 1.0 is a fair value.
Of course, there are many risks that must be discounted from any valuation. The company delisted from the NASDAQ back in 2005 and trades on the OTC Markets now where it has "Limited Information" warning, although it voluntarily made the decision to reduce costs. With a market capitalization of just over $300 million, the company is a micro-cap security with limited trading volume and liquidity.
Taking these factors into account, investors may be comfortable paying closer to 12x earnings, which puts a fair value close to $57.60 per share. With shares currently trading at $42.74 a piece - their all-time high - investors are looking at a 35% premium based on 2013's EPS. Assuming 10% growth in 2014, a reasonable price target for the next nine months or so may be close to $63.36 per share.
Potential Catalysts to Unlock Value
Conrad Industries is likely off-limits to many institutional investors given its micro-cap and limited-reporting status as evidenced by its 2% institutional ownership, according to Google Finance data. Individual investors tend to move the stock with average volume of just 5,500 shares per day - or roughly $250,000 in dollar volume - although its beta co-efficient remains below the S&P 500 at just 0.61.
Management's efforts to institute a special dividend and repurchase stock were likely big catalysts throughout 2013. In 2014, investors could expect some more of the same given that the buyback program was increased (and may be due for another increase) and the backlog suggests future revenue will be on the rise. Additional moves like these or special dividends could further boost the stock.
Finally, the increase in horizontal drilling and fracking has led to a greater number of commercial customers acquiring barges used to transport petroleum products. In 2013, energy contracts accounted for about 33% of its backlog with other commercial contracts picking up the remaining 67% of the backlog. It's also worth noting that customer concentration isn't a very significant issue.
Key Risks to Consider
Conrad Industries appears to be trading at a discount to its fair value, but there are a number of risks that investors should carefully consider:
- Energy Exposure. The company is reliant on ongoing improvements in the energy industry to drive growth after the slowdown in the Gulf of Mexico.
- Insider Control. The Conrad family and related parties control a large portion of the stock, which means investors may have limited say in its direction.
- Stock Dynamics. The company trades on the OTC Markets with limited liquidity and transparency, which means investors could have a hard time analyzing the company and buying/selling stock in the open market.