McCoy Global Inc (OTCPK:MCCRF) provides various equipment, parts and services to the oil and gas industry. In particular the company designs, manufactures and installs sensors for harsh environments, control and monitoring systems, wellbore construction equipment, parts and consumables, customized engineering solutions, and rents out equipment. Competitors are among others Perma-Pipe International Holdings (PPIH) (also a microcap) and unlisted Premiere Inc.
According to the company its products are used predominantly during the well construction phase for both land and offshore wells during both oil and gas exploration and development. I think most revenue comes from special construction equipment such as power tongs (see also here) and directly related measuring systems such as its torque-turn system. Unfortunately the company does not split up revenue in product segments. The company gives some information on geographic segments. Based on this information I estimate over 50% of the revenue comes from the U.S. and Canada. The rest of the revenue is mainly from the Middle East/Africa and Europe.
Though the stock is listed in Toronto, Canada, with ticker MCB, the company manufactures its products in the US. Almost all fixed assets are in the US. The reporting currency is still the Canadian dollar. Therefore in this article I mean "Canadian dollar" when I write "dollar" or "$".
With the example of many US-listed Chinese smallcaps I think being listed at a foreign exchange can be a red flag. Related to McCoy specifically, the concern is that I think financial regulators are more flexible in Canada than in the US. In this case the reason for the foreign listing is that the company was originally a Canadian company, founded in 1914 in Alberta. When it went public, in 1999, the company's operations were still in Canada. After the IPO the company restructured, closed and sold Canadian subsidiaries and acquired several companies in the US. So there is a good historic explanation for the Canadian listing. Nevertheless I believe it would be a good move for the company to list in the US. I think this will increase investor interest and will result in a higher stock price. However the costs for moving the listing might be too high for such a small business. BTW , do not trade this stock in the U.S. since you will find much better liquidity in Toronto.
See also the company history. This was once a family business but the founding family sold several decades ago, before the company went public and before the secondary public offer in 2007. The current CEO started in 2002. That was just after the company started specializing in servicing the oil industry: in hindsight probably a brilliant idea, with good timing as well. Also I think the secondary public offer in November 2007 was timed very well, that is when the share price was still very high. In that secondary public offer not only the company raised 40 million dollar but also the private equity fund who had bought out the founding family sold for 10 million dollar of shares.
The reason I find this stock interesting is because it is cheap compared to its current assets minus all liabilities. This is also called net current asset value or simply NCAV and is a proxy for liquidation value. In fact at a share price of 0.67 dollar the multiple NCAV/Market cap is 1.5. This is a so-called net-net: a stock trading below or close to its liquidation value ignoring the value of the non-current assets. Such stocks are well known for their great returns. These returns are achieved on a statistical basis only. A portfolio of net-nets will do well but it is next to impossible to predict the returns of individual net-nets. This stock is a very good fit for a net-net portfolio as I will describe below.
The stock is not only cheap but also has other good statistical properties. Every 2 weeks I rank global net-nets on several statistical properties such as Financial Strength, NCAV/Market cap, trading liquidity and a measure for financial distress. According to this ranking McCoy Global is even cheap compared to other net-nets. See also this article for more information on ranking and statistical investing.
Statistically stocks also have better returns when they are at a 3-year or a 5-year low. McCoy Global is close to its 5-year low of 0.58 dollar.
As you would expect from such an extremely cheap stock McCoy Global does not seem to have substantial competitive advantages or great asset allocation. I checked this using the 8-year metrics described in the book Quantitative Value. For this company these metrics are not only below average, they are really bad.
The company spends significant sums on research and development, and files patents. In Google Patents I count 9 patents that expire in 10 or more years, see here with at least one recent patent. In 2017 the company spent $2.7 million and last year $3 million. Before 2017 R&D spending was close to $1 million per year. That the company has increased its R&D spending is a good sign.
I think net-nets are more likely to be frauds than other companies. In fact, that is one of the reasons these stocks are so cheap. However what I found look very good for investors in the stock.
I did several things to check governance. A search on the company name and keyword “fraud” did not reveal any relevant links. Glassdoor reviews of employees are reasonable although suggesting too much overhead.
Questionable governance is also expressed in payout behavior. If a company makes a profit for several years in a row it should pay a dividend, or when the stock is very undervalued it should buy back its own shares. And dilutions harm existing shareholders less if the stock is much overvalued.
I already covered that the company sold stock when the share price was high in 2007, just before the financial crisis. Until 2015 the company paid a dividend. This was when the oil price was still high and the company was profitable. In 2018 the company spent about $265k on buybacks. These buybacks were probably done at book value, so it bought back slightly more than 1% of the shares. In 2013 and 2014 the company did small dilutions (much above book value) but paid more dividend than it raised from the dilutions.
I expect more buybacks to come since the company recently renewed its buyback plan. This plan allows the company to buy back up to 5% of its shares. With $6 million of cash net of debts the company has certainly enough money to buy back the full 5%.
Furthermore it is a good sign if a company has large outsider shareholders. Several funds own shares of McCoy Global suggesting trust in the company and management. Asset management company Franklin Resources owns 14.99%, Burgundy Asset Management owns 17%, Fidelity owns 15% and Wellington Management Company owns 11%.
Also the 2 main insiders put their money where their mouth is: The CEO, Jim Rakievich, owns 692,108 shares including 120k restricted shares. The non-executive chairman, Christopher T. Seaver owns 237,047 shares including 39.75k “deferred share units”.
Finally related-party transactions can suggest questionable governance. I have only checked the related-party transactions over 2018. In that year the company does not report any related-party transactions. So all still good.
In 2018 the CEO earned about $650k. Two other executives earned $300k-$350k each. I find that a lot of money for a company with a book value of $40 million but I imagine the company needs to be competitive with its remuneration policy. Variable compensation is low, which is good because high variable compensation increases the probability of excessive risk taking. BTW there are 1.3 million employee options but these are all way out of the money.
After being in the red for 4 years with heavy losses in 2015, 2016 and 2017 the company reported small profits during the last 3 quarters. The company says this is the result of restructuring efforts. Among others the company closed its factory in Alberta last year. Production from that facility was moved to the US. That current profits are the result of cost savings from restructuring makes it more likely the current and future quarters will also be profitable.
While backlog slightly decreased year-over-year at the end of the first quarter of 2019 backlog increased again in April. Again it seems likely the company will report a profit again over the current quarter. Then the company will have been profitable for four quarters in a row, so a full year. I expect the company to show a net income of $0.02 per share over the current quarter. That implies a profit of $0.09 per share over 4 quarters. Then the stock will also be cheap based on P/E, with a P/E of 7.4 at a share price of $0.67.
Obviously demand for its products depends on the oil price. When oil is high there is more drilling and therefore more drilling construction and therefore more demand for the company's products and services. The oil price was high until 2015 and before 2015 the company was very profitable. After 2015 the company booked losses.
If oil goes back to the price level of before 2015 (100 USD per barrel) I expect the company to become very profitable again. This is extremely unlikely but you never know. A major disruption in an important oil producing company such as Saudi Arabia would do it.
If the oil price goes back to 75-80 USD I still expect the company to book good profits of at least $0.05 per quarter, equivalent to an EBIT of $1.4 million and slightly more than twice the quarterly profit over the last 9 months. With an EV/EBIT multiple of only 6 the share price would double.
All in all this is a very good net-net, with little downside and much upside.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long TSE:MCB (McCoy Global shares trading on the exchange in Toronto)