Joshua Heller's  Instablog

Conrad Industries closed today at $16.90 up $1.77 after releasing 4th quarter numbers and their annual report. For those not familiar with the company, CNRD delisted in 2005 and trades on the Pink Sheets (Yahoo Finance CNRD.PK). Management also owns over 50% of the company.

In the 3rd quarter, a customer had canceled a large contract. This lead me to hold off on buying additional shares (granted it is already a large position) while I waited to see an update. Even with the cancellation, there were not any issues with revenues in the 3rd quarter report (and now the 4th) as revenues were 59MM and 63MM.

"During the third quarter of 2011, a customer advised that it was defaulting on contracts for the construction of five-LPG tank barges, four-30,000 bbl. tank barges, two-tow boats, four-7,500 bbl. tank barges and two-10,000 bbl tank barges. Except as noted below, all vessels subject to the default were sold to other customers prior to yearend with no adverse financial impact to the Company. The two tow boats and two of the 7,500 bbl. tank barges were in the early stages of construction, the contracts were cancelled, and the material for these has been included in our inventory. The two remaining 7,500 bbl. tank barges have not been sold and the contracts have not been cancelled. As a result of contract provisions that allow us to recover from the defaulting customer the difference between the contract price and what we sell the barges for, progress payments already made by the defaulting customer and favorable market conditions for these vessels, we do not expect any material adverse financial consequences due to the default of these remaining two barges."

One of the other bullish items in the report was a large increase in CapEx. One of the concerns that I had was that the industry was on a temporary upswing from low demand in previous years. Instead, it looks like CNRD is winning more business and sees room for further expanson.

"During the past eleven years, we have made, in the aggregate, approximately $49.0 million of capital expenditures to add capacity and improve the efficiency of our shipyards. This includes $4.3 million in 2011 which was primarily capital additions at our four locations to increase capacity and operational efficiencies, and to replace leased equipment with Company owned equipment. Our Board of Directors has approved a $20.8 million capital expenditure program for 2012 which includes a contract we entered into July 2011 to purchase 50 acres of property adjoining our Conrad Deepwater facility for approximately $5.5 million which is subject to customary closing conditions."

While the company is spending a large amount of cash on CapEx, the company still believes it is prudent to buy back additional shares via 10b-5 plan (due to low trading volume). The company announced another 5MM buyback in January 2012.

The last thing I like to look at is a spreadsheet of 5Year (10Year if information is available) of all the relevant numbers. Just because a stock is cheap does not mean it will suddenly go to fair value. We want to make sure that even though it is cheap relative to the market, it is also cheap to itself.

https://docs.google.com/spreadsheet/ccc?key=0At1Wluk5zm-ZdDMzaXNSVm9WcE8yM0tzOVdsbUxEdGc

Looking at the linked spreadsheet, we can see that in 2007 the company was 'cheap' to the market but by 2008 you would not have been very happy. Of course I am cherry picking the worst year for the market in recent memory and many stocks did do worse.

I have only owned this stock since early 2011 so I cannot say for sure what I would have done but the idea is to take money off the table as the risk/reward becomes less favorable. We see at the end of 2007 that the company was ahead of itself in terms of Book Value but probably cheap on all other metrics.

Even though I think CNRD could easily trade at $30 in the future (perhaps a catalyst like relisting shares), if we see book value near 1.5x I would be interested in taking some money off the table.

The other reason why I like to have this data available (even though it is time consuming to enter it all in) is that it really should give you conviction. Even though book value increased and the company went from being in net debt to net cash in 2008, sentiment on the entire market was so poor that CNRD was overlooked.

So where are the negatives? I could look at the high CapEx spend as being too risky but with management having been so prudent in the past 11 years, I do not think this would be an issue. The company will still have net cash on the balance sheet and is basically debt free. Should 5 year EPS, FCF, EBITDA growth be an issue? With all of the headwinds with the economy and Gulf of Mexico, this does not concern me. In fact, it is good to see that these metrics are back to 2007 highs. Could the stock be 'dead' money for the rest of the year? I can see that and would be disappointed, but if we saw no movement for 2 years and then in the 3rd year we saw a double, we would all still be very happy.

Disclosure: I am long CNRD.PK.

With a nearly 50% increase in AAPL stock price in the first quarter, I thought it was time to revisit my AAPL long thesis. While I view AAPL as still being cheap, I started looking at some of the expectations for this quarter and they seemed high.

I created the 10 year financials (which are linked below). With the tremendous growth of AAPL revenue and profits, I do not see much value in the historical numbers. I think the best metric for AAPL is EPS, I did keep EBITDA, FCF simple, and FCF numbers there for anyone interested in looking at those numbers.

One thing that I did find interesting was that the cash on the balance sheet on AAPL is slightly misleading. AAPL has cash on the balance sheet that is larger then the book value of the company. When I saw this I thought I had made an error but it turns out that the Accounts Payable and Accrued Expenses are very high relative to Accounts Receivable.

I also created a projection for year end 2012, EPS, cash on balance sheet, etc. What I am looking at is what stock price is reasonable? I could see 800 or 850 before I would take profits. (I could reduce before that but just for risk management purposes). I think my EPS of $40.00 per share is very conservative.

https://docs.google.com/spreadsheet/ccc?key=0At1Wluk5zm-ZdFNmbkpZWEhVQnZBSlpITkk2Tnk0Y1E

Where I see the most value is looking at the past sales data by product line to see if expectations are reasonable. On the third tab, you can see past actual numbers and some analyst expectations that I have run across online.

Some of the expectations seem too high for me. However, I think about the second price point with iPad and think about how that helped iPhone numbers. In the end, I can see the numbers being hit, so unless we see a further increase in AAPL shares in the run up to earnings, I will sit tight with my shares and know that we could see some giveback in earnings on a product sales miss or a guidance miss.

Disclosure: I am long AAPL.

Xyratex (XRTX) closed at $14.10 on January 10th, 2011.  Over the past year, shares have traded in a range of $10.50 to $20.45.

XRTX reported its 4th Quarter and fiscal year results on January 6th.  

seekingalpha.com/article/245333-xyratex-...

Free Cash Flow generation:  During the fiscal year, XRTX generated 40M in free cash flow (60M Operating, 20M capital spending).  As XRTX sales are cyclical, account receivables and inventories increased by 170M while account payables increased by 59M.  To ignore the effects of changes in working capital, another way to look at FCF is to calculate using Net Income + Depreciation - Capital Expenditures.  Using this calculation, FCF is 137M (139M + 18M - 20M). 

Valuation: At today's closing price, XRTX current market cap is 427M.  The company has 90M in cash and no debt.  Using the two FCF valuations above, the market is valuing XRTX between 2.460 and 8.425.  With 8.5x valuation at the top end of the range, XRTX could move to 10x without being expensive.  Since XRTX is cyclical, valuation should not exceed 10x. 

XRTX has a strong margin of safety with a current valuation of 8.5x the high end of FCF generation.  The stock could increase significantly as cash generation increases.  

Long XRTX (I am looking for a double)