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Gencor Industries (NASDAQ:GENC) is based in Orlando, Florida and manufactures heavy machinery used in the production of road construction materials, environmental control, and synthetic fuels. Management believes the company has the largest installed base of asphalt production plants in the United States.

The company experiences a seasonal nature for its products due to the characteristics of the road construction industry. With the majority of road maintenance and construction projects performed during summer and fall, Gencor receives the majority of its orders between October and February. Subsequently, production levels escalate and product shipments tend to occur over the company's fiscal Q3 period.

Stock Information

Gencor has two class of stock - common shares and Class B. The common shares trade on the NASDAQ under the ticker GENC. Class B shares are almost 95% owned by management and directors, providing significant voting power over elections for its Board of Directors. At the most recent price of $7.05 per common share, the company has a market cap of approximately $67.1mil.

Risks

Demand for Gencor's products is primarily dependent upon government programs to maintain highway infrastructure in the U.S. Originally enacted in 2005, the Safe, Accountable, Flexible and Efficient Transportation Equity Ace - A Legacy for Uses (SAFETEA-LU) was established to provide guaranteed multi-year funding, totaling $244.1 billion, for improving and maintaining U.S. federal highways. The act has subsequently experienced several extensions which have confirmed funding levels through to June 2012.

Currently, a long-term highway funding bill is before Congress. However, an ongoing stalemate in Congress over finalizing the bill prompted House Speaker John Boehner (R-Ohio) to comment that an additional six month extension may be the result. Continued extensions of SAFETEA-LU, as opposed to a new multi-year highway program with defined funding levels, may limit the industry's ability to plan for and execute long term projects and curtail demand for Gencor's products.

Like many companies, the economic downturn has also negatively impacted Gencor. The tightening of credit markets may restrict the ability of the company's customers to secure financing. This could result in reduced orders for Gencor's products as customers move towards equipment maintenance programs instead of new purchases. Additionally, rising oil, gas and steel prices would negatively impact Gencor's margins.

Investment Opportunity

Using the most recent March 2012 10-Q and adjusting for operating leases reported in the 10-K, Gencor has approximately $10.76 in net assets per share based on 9.52 million shares. For a more conservative figure, we can remove long-term assets from the calculation and determine a figure of $9.86 per share in net current assets. With common shares trading at $7.05, this provides about a 28% discount to net current assets.

Of interesting note is the composition of the firm's asset base. Marketable securities is by far the largest asset category reported in the company's financials, accounting for 71% and 66% of current and total assets, respectively. Further investigation reveals the majority of funds are held in municipal bonds and equities. However, $13,754 of these funds are held in cash or money funds.

Marketable Securities

Equities

$ 17,425

Mutual Funds

$ 2,505

Corporate Bonds

$ 11,112

Municipal Bonds

$ 32,151

Cash and Money Funds

$ 13,754

Total

$ 76,947

From a balance sheet perspective, Gencor appears to be financially sound with substantial liquid assets providing it the ability to continue to weather the depressed conditions in the industry.

Assessing the income statement for the quarter ending March 2012, the company reported operating income of $987,000 and net income of $2.77 million on sales of $19.34 million. The majority of reported income is a result of the company's security portfolio, with pre-tax contributions of $3.16 million. These figures compare favorably to the quarter ending March 2011 with the company showing improvements across all categories.

Conclusion

Gencor provides an interesting investment opportunity at current price levels. From an asset perspective, the shares trade at a discount to net current assets which should provide a level of safety at current price levels. While the current stalemate in Congress over finalizing a highway funding bill has impacted Gencor and its customers, a resolution to and passing of a multi-year funding bill would provide increased visibility into the environment and may result in increased orders for Gencor's products as customers initiate longer-term construction projects. This may serve as a catalyst for the company and provide reason for an upward revaluation.

Appendix

Consolidated Balance Sheet

Assets ('000s)

31-Mar-12

Cash

$ 13,502

Marketable Securities

$ 76,947

Accounts Receivable

$ 1,535

Costs and estimated earnings in excess of billings

$ 379

Inventories

$ 14,657

Deferred Income Taxes

$ -

Prepaid Expenses

$ 1,265

Total Current Assets

$ 108,285

Property and Equipment, net

$ 8,570

Other Assets

$ 99

Total Assets

$ 116,954

Liabilities

Accounts Payable

$ 2,769

Customer Deposits

$ 8,136

Accrued Expenses

$ 3,004

Total Current Liabilities

$ 13,909

Deferred and other income taxes

$ 512

Total Liabilities

$ 14,421

Source: Gencor Industries: A Smooth Road Ahead?