If you need a sturdy road, Gencor (NASDAQ:GENC) is your company. Gencor Industries designs and manufacture of heavy machinery used in the production of highway construction materials, synthetic fuels, and environmental control equipment. It produces hot-mix asphalt plants used in the production of asphalt paving materials; and related asphalt plant equipment, including hot mix storage silos, fabric filtration systems, cold feed bins, and other plant components. The company also manufactures combustion systems and soil decontamination machinery, as well as combustion systems for rotary dryers, kilns, fume and liquid incinerators, boilers, and tank heaters. In addition, it provides thermal fluid heat transfer systems to transfer heat for storage, heating, and pumping viscous materials, such as asphalt, chemicals, and heavy oils. Gencor Industries sells its products through sales representatives, independent dealers, and agents primarily to the highway construction industry worldwide.
The company has not seen new funds from the infrastructure plan due to delays, thus the company’s revenue and earnings have suffered. Also adding to the suffering is a freeze in capital equipment spending amid the recession. Investors have priced Gencor as if roads will never be built again. The US, with one of the worst road infrastructure quality among developed countries will surely start to build and improve roads again, surely this time with a vengeance stemming from the highway bill.
Heavy insider ownership gives the management incentive to strongly improve the business. CEO E.J Elliott owns 13.2% of the shares outstanding, company president Marc G. Elliott owns 3.7% and director John E. Elliott owns 7.3%. Collectively all directors and executive officers own more than 15% of all the shares outstanding. Source: Gencor Industries proxy statement.
The company has $6.33 per share in cash with no outstanding debt. The share price is currently at $6.86. This gives the company an operational value of $0.53 per share. The company is basically selling for free as cash per share is often the floor on a stock price (unless substantial losses such as lawsuits or one-offs are seen). The company has posted losses of $0.04 and $0.03 in Q1 and Q2, respectively. It may post another loss in Q3, however after the highway spending bills takes effect, the company should start to observe a substantial flow of capital from the measure. If we normalize the earnings at $0.70 per share annually, we get a forward PE of 9.8. If we take the value of the company’s operation side ($0.53 per share), we get an adjusted PE of only 0.76. That is a PE of less than 1! If we conservatively normalize annual earnings at $0.70 and take a hypothetical PE of 10, the company’s share price of operating business should be $7.00 (current price $6.86). If we further add the cash equivalents of $6.33, the company’s overall share price should conservatively should be $13.19 ($6.86+$6.33). When (not if) the company starts to receive highway road building funds, Gencor has vast potential to increase its earnings beyond the conservative levels. Given the Gencor’s excellent balance sheet with substantial cash and no debt, current low share price, and excellent prospects for road building, the company is clearly mispriced and presents a very attractive investment opportunity.
With president Obama’s recession stimulus plan centered on creating jobs by boosting the nation’s infrastructure, Gencor is potentially a large beneficiary. Combine this growth potential with its net cash position, the investor has a wide margin of safety and is getting the operating business of the company for almost free.
Disclosure: Long GENC