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Conrad Industries: Undervalued Shipping Company Has Massive Growth Potential In Long Term

|Includes: Conrad Industries, Inc. (CNRD)

Conrad Industries has a market capitalization which is lower than total revenues, making it a potentially undervalued stock.

Conrad Industries is very solvent company due to its strong cash flows and history of robust revenue growth.

Growth will accelerate with an increase in offshore oil activities in the Gulf of Mexico, and the rapid aging of gulf barges.

A 20 million dollar share buyback program, combined with recently announced dividends will drive up the stock value by the end of 2015.

Relative and Fundamental Value

Conrad Industries is a small cap stock with a market cap of $ 211 million. The stock is inexpensive from an earnings perspective with a 7.5 PE ratio compared to major competitors such as Abertis Infraestructuras SA (25.5) and Golden Ocean Group (14.) Although this PE ratio is significant, it should be noted that in the shipping industry the PE ratio is often untelling because earnings can evaporate or accumulate quickly. The more valuable ratio is the return on assets or net asset value per share. This is due to the capital intensive nature of the shipping and freight industry. The marine transportation industry has an average return on assets ratio of -1.75%. Conrad Industries boasts an impressive return on asset ratio of 10.68%. This is highly reflective of skilled management and disciplined asset utilization. Even small inefficiencies can dramatically affect gross profit margins in the industry.

Conrad Industries has shown a historical trend for vibrant growth. Revenues have doubled and the earnings per share ratio has tripled since 2010. Net income has grown on average by 12.1% for the last 3 years. Perhaps most significant is the fact that Market Capitalization (233 million) is less than total revenues (235 million). This statistic show that the stock price is plausibly undervalued.

The Industry

The Jones Act- Section 27 of the Merchant Marine Act of 1920 (the "Jones Act") requires that all vessels transporting products between U.S. ports must be constructed in U.S. shipyards, owned and crewed by U.S. citizens and registered under U.S. law, thereby eliminating competition from foreign shipbuilders with respect to vessels to be constructed for the U.S. coastwise trade. Many customers elect to have vessels constructed at U.S. shipyards, even if such vessels are intended for international use, in order to maintain flexibility to use such vessels in the U.S. coastwise trade in the future

The OPA90 regulation passed in 1995 called for the gradual phasing out of single hull ships. Double hulled ships are to have almost completely replaced single hulls by 2015.

The Industry is divided into shipbuilding for defensive and non defensive purposes. Conrad Industries specializes in the non-defence sector which has been growing at an annual rate of 3.9% per year.

The Business

Conrad Industries operates 5 major ports after a recent expansion. One in Morgan City Louisiana , three in Amelia Louisiana, and one in Orange Texas.

During gaps of the production schedule. Conrad Industries builds stock vessels which it sells in separate contracts. This gives Conrad Industries a higher asset turnover ratio than its competitors. Conrad Industries has a revolving credit line of up to 10 million dollars till April 30 2016. The interest rate is at JPMorgan Chase prime rate or LIBOR plus 2 %.Currently Conrad Industries has no accounts outstanding. The Debt to Equity ratio is .02 due to recent payments on existing debt with cash surpluses. Conrad Industries also possess letters of credit work 389,000$.

Conrad Industries has about 182 customers in industries including energy(gulf of Mexico oil and gas industry), dredging, construction, towing, transportation, bunkering markets, US Army Corps of Engineers, US Coast Guard and various governmental agencies.

Dividends

Since its IPO in April 2005, the company has yet to pay dividends on common stock, except a special $2 dividend per share made in 2013. Conrad Industries had made it clear in the past that it intends to keep all retained earnings to meet working capital requirements and reinvest in the business. Now the company sits atop a reserve of $64.63 million in cash, more than enough to cover their $53.43 million in liabilities. This year the company will start paying a normal dividend rate of 25 cents per share of common stock. Such a dividend would give them a dividend payout ratio of 8.17%, a modest ratio that could be expanded on in the future and will lead to greater dividend payments as revenue and earnings continue to grow.

Share Buy Back Programs

Conrad Industries has announced a massive 20 million dollar share buyback program. The goal being to cancel 10% of current stock. the company has currently issued 6.09 million shares outstanding and after the buyback there will be approximately 5.5 million shares left. By conservative estimate it is predicted that net income will rise to 34 million by the end of this year. The combination of these factors will lead to a new EPS ratio of 6.26 ,when dividend payments are subtracted. Under current PE ratios this leads to an end of 2015 valuation of $43.75. The stock price now sits below 32$.

The Potential for Future Growth

In the past 5 years. Conrad Industries has aggressively reinvested earnings back into the company, It has spent 39.6 ,million dollars to increase the capacity and efficiency of their 5 major shipyards. This included a 12.4 million dollar capital expenditure to replace leased equipment with company owned equipment. In 2012 the company acquired a new 50 acre ConradIndustries Deepwater South Facility, the first ship produced here was finished in the first quarter of this year. An additional 9.3 million dollars has been invested throughout the course of the year.

In 2013, 35.2% of total revenues were off the oil and gas industry in the Gulf of Mexico. Despite the plunge in oil prices, Gulf Oil production continues grow at a healthy pace. ACcording to the Wall Street Journal several new projects from Royal Dutch Shell, Hess Corporation, ExxonMobil and Chevron are expected to be realized by the end of 2015 and create a total new capacity of 900,000 barrels of oil per day. With this new investment it is predicted that oil extraction will rise to 1.9 million barrels per day by 2016. Additionally, there is believed to be up to 48 billion barrels of undiscovered oil in the Gulf of Mexico underlining the potential for future growth. Increased oil extraction will provide Conrad Industries with a future growth source.

Growth with Cheap Oil

With the recent decline in oil prices investors may fear that oil revenues may go down and limit future growth. Although oil revenues constitutes 35.2% of total revenue, Conrad Industries has reported an impressive backlog of $135 million at the end of the last quarter, nearly a third of total revenue. With its newly constructed ports and construction facilities Conrad Industries is in a position to start constructing and delivering upon that backlog, giving it a source of steady revenue even in this temporary period of low oil prices. It is important to note that in the short run, the profitability of oil extraction does not affect Conrad Industries revenues. Only the actual level of oil extraction impacts gross revenue. As stated above, oil investment in the gulf is still high and the current oil rig count is near historic record, giving stability in oil revenues. According to a recent report by the Department of Energy, oil production will continue to rise in the country. In addition, President Obama has recently announced an executive action which ends the 40 year old ban on US oil exports. Increased international demand for US oil may help prop up oil prices. Conrad Industries possesses a diverse revenue stream,compared to other competitor companies, which also proves to be advantageous. 64.2% of total revenues are derived from commercial shipping. Commercial shipping flourishes in current conditions of cheap credit and oil, thus this sector of revenue is likely to grow. 25.9% of total revenues come from repairs. It is expected that this area of revenue will see considerable growth in the years to come. This is due to the fact that over 41 % of total barges in the Gulf are over 25 years of age and are nearing the end of their working lives, corresponding to increased maintenance and repair costs.

Risks

The largest posing risk is the possibility of declining oil revenues. The most viable solution to hedge potential risks would be to buy puts on oil equivalent to roughly half of the total investment on Conrad Industries shares. This will insure that even if oil prices plunge further and CNRD stock declines, profits will still be made from the puts.

Conclusion

Conrad Industries is an undervalued stock. During this period of cheap oil it will continue to grow substantially. It has an impressive history of revenue growth and a considerably higher return on assets ratio than the industry average and it main competitors, reflective of highly disciplined management and resource utilization. Share buy back programs and new sustainable dividends will continue to drive up the value of the stock.

Sources

http://www.otcmarkets.com/stock/CNRD/profile

http://www.conradindustries.com/admin/files/GTT%20NA%20Signs%20with%20Conrad%20-%20Press%20Release.pdf

http://www.morningstar.com/invest/stocks/82028-cnrd-conrad-industries-inc.html

www.marketwatch.com/investing/stock/cnrd...