In this article I am going to show you a fantastic micro cap that has had a 10% ROIC average over the past 10 years, and has many other great attributes that I will talk about in the article. By my estimates the company is at least 30% undervalued, and there appear to be some potential catalysts in its industry that could help unlock the value of the company. For the reasons I talk about in the article, this company has become only the third company I have bought in the past year. I hope you enjoy.
Core Molding Technologies (CMT) is a manufacturer of fiberglass reinforced plastic products. It supplies products to companies in the medium and heavy trucking, automotive, marine, and other commercial industries. The plastics are used in automobile hoods, air deflectors, air fairings, splash panels, engine covers, fenders and bulkheads. It has five production facilities in: Columbus, Ohio; Batavia, Ohio; Gaffney, South Carolina; Warsaw, Kentucky; and Matamoros, Mexico.
Core Molding Technologies has about 90% of its current business coming from the medium and heavy trucking industry. Sales to Paccar (PCAR) and Navistar (NAV) make up about 75% of current sales as of the most recent quarter. CMT has been slowly trying to increase sales to other companies, which I think is a good thing in the long-term because if its relationship deteriorates with either of the above two companies CMT could be devastated. CMT states that its current relationships with both Paccar and Navistar are good and that it works closely with both companies to solve any issue, work on research and development, and pricing.
As of this year's proxy form, Navistar currently has a seat on CMT's board of directors as it owns 9.2% of CMT's stock, so I do not see Navistar ending its relationship with CMT any time soon. CMT insiders own around 16% of the company's stock. Mario Gabelli personally and through his funds owns 14.1% of CMT's stock. Rutabaga Capital owns 9.5% of its stock. Rutabaga is a private investment firm whose concentration is in "undervalued, unloved companies."
I always like to see high insider ownership and I am happy that CMT is owned by a couple of value oriented investment firms. I was especially happy to see that Mario Gabelli is a big owner of CMT's stock. He has even bought shares in CMT with his own money. I also really like the ownership by Navistar as that could lead to a potential buy out or at the very least, a continued partnership between the two companies. I am going to be watching very closely to see if and when any of the above starts selling CMT's stock as that could be a sign that there are big problems ahead for the company.
Here are some quotes from two of CMT's biggest buyers about the potential huge catalyst in CMT's main area of operations, the trucking industry:
- From Paccar: "Over six million heavy duty trucks operate in North America and Europe, and the average age of North American vehicles is estimated to be seven years. The large vehicle parc and aging industry fleet create excellent demand for parts and service and moderate the cyclicality of truck sales."
- From Navistar: "For our Truck segment, we expect benefits from further improvements in our "traditional" volumes as the industry continues to increase from the historic lows experienced in 2009 and 2010. According to ACT Research, the average age of the truck fleet was 6.7 years at the beginning of 2011, which is the highest average age since 1979. We anticipate higher sales in 2012 for truck replacement as our customers refresh aging fleets. We also expect demand for trucks to increase as freight volumes and rates continue to improve as the economy recovers. In addition to increased demand, we expect to further benefit from improved revenues and margins associated with the exclusive use of our proprietary engines. We expect to realize benefits from plant optimization actions taken during the trough of the truck cycle. Finally, we anticipate positive contributions from business acquisitions and investments made during this period."
The above is exceptional news and should serve as a catalyst for CMT.
These valuations were done by me, using my estimates and are not a recommendation to buy any stock, in any of the companies mentioned. Do your own homework.
All numbers are in millions of U.S. dollars, except per share information unless otherwise noted. Valuations were done using 2011 10K and second quarter 2012 10Q.
|Assets:||Book Value:||Reproduction Value:|
|Cash & Cash Equivalents||0||0|
|Accounts Receivable (Net)||26.3||20|
|Deferred Tax Asset||1.8||0|
|Other Current Assets||2.8||0|
|Total Current Assets||43.5||26|
|Deferred Tax Asset||1.1||0|
I am using CMT's fully diluted share count of 7.4.
- 51/7.4=$6.89 per share.
EBIT and Net Cash Valuation
Cash and cash equivalents are 0
Short term investments are 0
Total current liabilities are 27
Cash and cash equivalents + short-term investments - total current liabilities=0+0-27=-27
- -27/7.4=-$3.65 in net cash per share.
CMT has a trailing 12 month unadjusted EBIT of 16.5.
5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:
- 5X=82.5/7.4=$11.15 per share.
- 8X=132/7.4=$17.84 per share.
- 11X=181.5/7.4=$24.53 per share.
- 14X=231/7.4=$31.22 per share.
Since CMT has had a record trailing 12 months in terms of EBIT, I have decided to normalize EBIT and taken the 10 year average of 8.2 to determine the more normalized intrinsic value of CMT in case it is not able to keep up the pace of the past year.
- 5X=41/7.4=$5.54 per share.
- 8X=65.6/7.4=$8.86 per share.
- 11X=90.2/7.4=$12.19 per share.
- 14X=114.8/7.4=$15.51 per share.
Revenue and EBIT valuation
I am again using trailing 12 month numbers.
|Average 10 year EBIT %:||6.69%|
|Estimated EBIT of:||11.24|
|Assumed Fair Value Multiple of EBIT:||8X|
|Estimated Fair Enterprise Value of CMT:||89.92|
|Cash, Cash Equivalents, and Short Term Investments:||0|
|Estimated Fair Value of Common Equity:||76.92|
|Number of Shares:||7.4|
|Equals:||$10.39 per share.|
My low estimate of value using a 5X EBIT multiple was $5.84 per share. My high estimate of value using an 11X EBIT multiple was $14.95 per share.
Price to Book and Tangible Book Valuation
|Tangible Book Value:||50.93|
|Industry Multiple Implied Fair Value:||112.05|
|Assumed Multiple as a Percentage of Industry Multiple:||95%|
|Estimated Fair Value of Common Equity:||106.45|
|Number of Shares:||7.4|
|Equals:||$14.39 per share|
My low estimate of value using 75% of the industry multiple was $11.36 per share. My high estimate using 125% of the industry multiple was $18.93 per share.
|Current Assets to Current Liabilities:||1.59|
|Total Debt to Equity:||23.60%|
|Total Debt to Total Assets:||12.30%|
|ROIC 10 yr avg From Morningstar:||10.62%|
|My Unadjusted ROIC TTM:||24.60%|
|Cash Conversion Cycle TTM:||54.47|
|ROE 10 yr avg:||15.73%|
|ROA 10 yr avg:||6.56%|
|COGS as a % of revenue 10 yr avg:||83.36%|
|COGS as a % of revenue 2011:||79.16%|
My Interpretation of the Ratios:
- I do not see any current problems with CMT's debt levels.
- CMT's ROIC is incredible, even if it falls back to the more normalized levels of above 10%. If CMT can keep up the level of the previous year this company is very undervalued.
- The cash conversion cycle is a measure of how fast a company can turn its inventories into cash. In CMT's case it takes them about 54.5 days to make the conversion. The number is lower than the high of about 73 in 2009, but not back to pre recession levels which were around 42 on average. I do not see a major problem here but would like to see the number creep down over time.
- If CMT can keep its current revenue and profit levels going then it appears to be massively undervalued on an EV/EBIT basis. If CMT reverts back to its 10 year average EBIT then it appears to be about fairly valued on that basis.
- ROE and ROA appear to be boosted recently in comparison to the 10 year average in part due to Cost of Goods Sold decreasing as a percentage of revenue. Hopefully CMT can keep up that pace.
The competitors that CMT lists in its annual and quarterly reports are as follows: Sigma Industries (SSG), Decoma Composites [an owned subsidiary of Magna (MGA) International], Molded Fiber Glass Companies, and Continental Structural Plastics. Here are my thoughts on each competitor after doing research on them.
- Sigma Industries (SSG) has operations in various industries including the heavy trucking industry, where CMT gets most of its sales from currently. Sigma's operations are mainly in Canada currently so it appears not to be too much competition for CMT at this time.
- Magna International (MGA) is one of the largest and most diversified auto parts suppliers in the world. I was a bit worried about the competition from Magna towards CMT, but MGA currently does not make sales in the medium and heavy trucking segment. Magna's main operations are in cars and light trucks at this time. Magna does state in its 10K that it is always looking for opportunities in various arenas including the heavy trucking industry. Magna's entry into the heavy trucking industry would be something to watch out for. I think that Magna buying out CMT would be a better option because CMT currently has a market cap of around $50 million and Magna's is $10.4 billion, meaning it would be a very minimal monetary investment which would also save Magna time from having to learn the processes by itself.
- Molded Fiber Glass Companies is a privately held company whose operations appear to be mostly in the automotive and wind energy arena. The little Molded Fiber Glass does in the trucking industry does not appear to be in direct competition with CMT, as its operations are in entirely different states and regions.
- Continental Structural Plastics is a privately held company who has operations in automotive, heavy truck, agricultural, HVAC, construction, and material sales. The following is the best information I could find on Continental: "Continental Structural Plastics, Inc. manufactures structural plastic components, bumper beam reinforcements, rocker covers, oil pans, stamped steel seat frames, and underbody shields. It also offers composite seat bases, engine oil sumps, and composite sunshade substrates; and moulders of glass-mat thermoplastic composites, as well as long-glass-fibre-reinforced thermoplastic and direct-LFT composites. The company was founded in 1982 and is based in Troy, Michigan with manufacturing plants in Petoskey, Michigan; and Sarepta, Louisiana." Again, CSP does not appear to be a direct competitor in to CMT as they appear to make different products.
After looking into CMT's competitors it appears that it does not have a direct competitor at this time and that it has found a very profitable niche which also might come with some minor competitive advantages.
- Undervalued by almost every one of my estimates of intrinsic value.
- I have not found any major direct competitors in CMT's main area of operations.
- The company has found a niche in its industry that has made CMT very profitable.
- The company's margins have been consistently good to great over the last 10 years: ROIC 10% average over that time period for example.
- Even if CMT is not able to keep up the pace of the previous year in terms of revenue and margins and reverts back to its 10 year averages, the company has been profitable over that time, even during the recent recession.
- Navistar, who is CMT's biggest customer, owns about 9% of the company. CMT insiders, outside value investment firms, including Mario Gabelli personally, and through his funds, own over 30% of the company.
- By my estimation, CMT looks like a potential buy out candidate.
- The company has been becoming more efficient in its operations in recent years.
- The vast majority of CMT's sales are to only two companies, and CMT would be devastated if its relationship with either of the two companies deteriorates.
- CMT is a very small company whose market cap is currently only around $50 million.
- CMT could be hurt if a bigger, better financed, company enters its industry.
- On a revenue and margins level, CMT has had a record past year which might not continue into the future.
- If the past holds true, CMT's results will be hurt quite a bit by any kind of recession or down turn in the economy.
- The trucking industry currently has the highest average age of trucks since 1979 which should lead to sustained sales and margin growth. The high age of the current trucking fleet should at least partially protect CMT's revenues and margins if there is some new recession. You can only hold off buying a new truck for so many years and many companies held off buying trucks during the recent recession.
- In my opinion CMT would be a great buyout candidate for someone like Magna who would be interested in entering the medium and heavy trucking industry as that would be less of a money and time investment for any potential company.
- Navistar, who already owns more than 9% of the company, could also be a potential buyer.
With all of the above stated I will be using my trailing 12 month unadjusted 5X EBIT estimate of intrinsic value of $11.15 per share. The reason I am using this estimate of value is that by my estimation, CMT should be able to at least partially sustain the previous year's record revenue and margin numbers. The 5X EBIT estimate is also conservative enough that it leaves a margin of safety if CMT were to revert back to previous year's revenue and margins.
I actually think that CMT should be valued at one of my higher estimates of value due to the steadiness of its margins over the past decade and some of the other factors listed above. I chose this estimate of intrinsic value due to the company's small size and some of the other risks listed above just to be safe.
The current share price is $7.35 which gets me a margin of safety of about 35%, reaching my minimum threshold of 30%.
Due to the previous, and for the reasons I listed throughout my article, I have decided to buy into CMT, making it only the third company I have bought in the past year along with Vivendi (VIVHY.PK) and Dole (DOLE).
As always your comments, critique, and criticism are welcome. Let me know what you think I could do better, where I might have gone wrong, and what you liked about the analysis.
Last minute update as I am getting ready to publish. Navistar's CEO of 30+ years has stepped down effective immediately. This situation is something I am going to watch very closely, but with the information that is currently available I still have decided to buy into CMT at this time. Hopefully this situation will not affect Navistar's relationship with Core Molded Technologies.