Core Molding Technologies: 2Q Earnings Review

Core Molding Technologies (CMT) released 2Q 2007 results on 8/9/07.

Press release highlights:

Sales to $38.3 million from $39.5 million in 2Q 2006

Product sales down 36% to $24.69 million from $38.43 million in 2Q 2006

Total sales stayed fairly even because of increase in tooling revenue to $13.61 million from $1.09 million

Cost of sales $33.7 million from $31.66 million in 2Q 2006

Net income down to $1.26 million ($0.12 per share) from $2.5 million ($.24 per share) in 2Q 2006

Profit margin 3.3% from 6.3% in 2Q 2006

TTM EPS $0.65 per share

Diluted share count 10,618,000

Cash flow from operating activities $2.91 million from $3.82 million in 2Q 2006

Cash flow from investing activities -$1.07 million from -$3.27 million in 2Q 2006

Cash flow from financing activities -$484K from -$790K in 2Q 2006

$17.5 million in cash

$6.85 million in long-term debt

Inventory $19.68 million

(SEC 10-Q)

I must say that management is handling this tough stretch quite well considering the industry situation. The business is still managing to bring in positive cash flow, they're still able to reinvest some money into the business without relying on financing activities, the balance sheet remains healthy and actually improving, and costs are being kept under control. This is not a dumb management team, but the thing that I worry about with CMT is the fact that trucking is losing some ground in the U.S. to railroads. I'm sure trucks will have a place here for awhile, the question is how consistent and how profitable of an industry it will be. Even with this in mind, I'm still finding CMT an attractive long-term investment. You rarely find a management team this connected to shareholders and the business and with such a knowledge of the industry and company. Not to mention that this is a micro-cap stock. I'm thinking that with this smart management team CMT will be able to expand for a good amount of time and start making some deals with other manufacturers. Management has weathered this storm so well to date, and you can't ignore the fact of how well the business was doing prior to this year.

I don't have much to say about this quarter's results. It seems that management is saying industry projections are a pick-up of sales in 2008. I can see that happening, and if that's true then picking up some of CMT here wouldn't be a terrible idea. I'm still believing that trucking will be facing a lot of pressure both from high costs and railroads. If oil prices fall back down like they did last fall it'd really help the industry get through this difficult time. Whether or not I'll be able to open a position in CMT anytime soon is a hard thing to answer, all I know is that this is an excellent management team with a company that definitely still has a future. Remember that they still are partnered up with fine businesses like Paccar and International, so CMT is pretty safe for the time being if their major customers can get it together this coming year. My guess is that they will. Plus, CMT will be going up an easy year next year; it probably won't be too hard to beat what they've done this year.

Currently the stock is at $7.00, a P/E of 10.77.

CMT 1-yr chart

Disclosure: none

Comments

[Amit Chokshi]

I like CMT and its management team overall but even at the lower price it's tough to get too interested as far as investing in the company. Management has kept costs in line as you said and the company looks dirt cheap on a trailing basis, which as with most cyclicals may be a value trap/peak signal. My reservations with CMT is that it only has 3 customers and one - International T&E - is their owner for the most part. It's like a Ford/Visteon relationship and while the company's balance sheet is strong and their capex is now modest, I just feel that an investor in CMT is hoping that truck demand stabilizes. I am not sure its the rails that are killing the trucks as opposed to the 2007 EPA emissions standard change for diesel engines. Because of that I think going off 2006 and even 2005 results as a potential return to norm in 2008 may be misleading because a lot of truck manufacturers increased orders ahead of 2007 in 05-06. Caterpillar and Accuride have both cited weak truck demand as a reason for some operating performance issues and given the slowdown in construction which accounts for a good portion of truck demand, I'm not sure even 2008 could see a pick up.

If you make some conservative estimates for 2007, these guys could top out at about $120MM in sales which would be below their ideal capacity for strong operating margins. I put their 2007 EPS around $0.41 a share or so (17x forward P/E valuation) and their forward EV/EBITDA around 5.2x (my est is ~$7.5MM for the year). That's a fair value for a company that is mostly US based (no material European truck exposure which is holding up well), has 3 customers that account for 80+% of sales, has a unionized workforce with I believe two sets of unions due for contract renegotiations this month and Jan 2008, and no material insider ownership (for microcaps I prefer to see a large chunk held my management).

[DavidKretzmann]

You make some good points, but I think it's important to look even further than 2007. If 2008 is expected to be a rebounding year, I would expect the market to lighten up on the business and stock a bit. CMT's limited customer base is a risk, they're really relying on the success of their three largest customers to continue expanding and growing. I'd like to see them bring in some new customers, but that is easier said than done.

Anyway, this will be an interesting business to follow over the next few years, it isn't perfect, but for a micro-cap I think it is an appealing business.