In a recent article on Gencor (NASDAQ:GENC) titled "Gencor Industries: At The Very Beginning Of Substantial Growth And Earnings Improvement", I explained my bullish thesis on the name. This thesis was based on 3 main factors:
- The catalyst brought about by lower crude prices, which made asphalt more competitive versus concrete.
- The catalyst brought about by the new Highway Bill.
- And GENC's valuation, where nearly all of the market capitalization was backed by cash.
I explained that due to the catalysts at hand, Gencor would, in the very short-term, start delivering a significant improvement in revenues and earnings.
Today, we got the first taste of what constitutes Gencor's delivery on my predictions. Gencor released Q1 FY2016 earnings, and these brought the following developments:
- Revenues increased 111% year-on-year.
- Gross margins increased from 5.5% of revenues to 24.8% of revenues, a massive improvement which exceeded anything I could ever expect.
- The company turned from an operating loss during Q1 FY2015, to $1 million in operating income for Q1 FY2016.
Also, while it can seem less relevant, GENC continued increasing its cash even in spite of the massive growth it's experiencing now (which consumes some cash). Once this growth stabilizes at more reasonable levels, it's likely that the cash balances will increase further still.
Gencor Will Keep On Delivering
As important as Gencor delivering on my thesis, is the fact that it's likely things will continue to improve even more. We have a couple of clues pointing that way.
Gencor had already ended Q4 FY2015 with a large increase in backlog (to $20.3 million). Well, during Q1 FY2016 this increased further still:
Our backlog continued to grow throughout the first quarter, and we began the second quarter with a backlog of $31.2 million.
This is a 53% sequential improvement and bodes well for Q2 FY2016. Q2 is Gencor's strongest quarter, but with this significant increase in backlog, we can expect a quarter with over $16 million in revenues and another strong showing in terms of EPS.
Another sign of feverish demand leading to large growth, is the growth in customer deposits. This already gave us a clue that Q1 FY2016 would be so strong, because by Q4 FY2015, customer deposits had risen to $4.4 million from just $0.3 million in Q4 FY2014.
Well, in Q1 FY2016 these customer deposits have risen further, to $6.1 million from $1.5 million in Q1 FY2016 and those extraordinary $4.4 million in Q4 FY2015. This, too, bodes very well for Q2 FY2016 revenues and earnings.
Catalysts Still Present
Furthermore, the two catalysts I explained in my original article are still present:
- Low crude prices leading to low asphalt prices, making asphalt more competitive with concrete.
- The impact from the new Highway Bill, which historically made itself felt over a period of years.
Hence, we can expect this cyclical improvement to last (possibly for a couple of years, not quarters).
A Limit To The Upside
Ironically, one of the things that makes Gencor cheap, also limits its upside. The large cash position works are reverse leverage.
With EV (Enterprise Value) being market capitalization + net debt, and with net debt being very negative (net cash), this means that Enterprise Value is a low number. For instance, at $12.60 GENC has an EV of ~$24.5 million. Were GENC to rise to $15.10, and its EV would actually double.
The one thing Gencor could do to limit this phenomenon -- and which would propel the stock further -- would be to pay a large extraordinary dividend. However, up until today the company has shown no intention to do so.
Not only did Gencor deliver a tremendous quarter, even better than the significant improvement I already expected in my bullish thesis, but it promised to deliver even more going forward.
The backlog alone gives us confidence that Q2 FY2016 will also be massive and, given the nature of the catalysts producing this improvement, growth will keep on being present even beyond that.
Disclosure: I am/we are long GENC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.