Gencor Industries

inspired by Barel Karsan blog on Gencor Industries and
guru focus

Description
Gencor manufactures hot-mix asphalt plants used in the production of paving materials. The Company’s H&B product line was first manufactured in 1894. The Company’s subsidiary, Bituma Corporation, formerly known as Boeing Construction Company, developed the continuous process for asphalt production, which has been adopted as the United States industry’s standard technology. The Company also manufactures a comprehensive range of mobile batch plants, soil remediation machinery, kilns, incinerators, thermal fluid heat transfer systems and specialty storage tanks for a wide array of industry uses.The machinery, manufactured in the US, is sold throughout the world.

Financials
Gencor has current assets of 95m (of which 71m are highly liquid) and total liabilities of 7m. Mr. Market offers us the company for 67m. After paying down all debt, the investor gets the fixed assets (27M) and a cash of 11 m for free! The investor pays nothing for the patents (not included in fixed assets). Liquid assets consist mainly of a growing portfolio of muni bonds. This portfolio was understated of 2m in previous quarter due to market volatility. Fixed assets consist mainly of 100 acres of land with 350 000 sq. ft. of offices and manufacturing facilities.
In addition, the company has another $32 million in inventory and accounts receivable against total liabilities of just $7 million. Inventory on the balance sheet is understated due to the fact that the company uses LIFO as its inventory method.

The company consistently spends a significant ammount on R&D. This IMO is crucial to maintain a competitive advantage in this industry.
Common stock and Class B shareholders have equal rights with respect to dividends, preferences, and rights, including rights in liquidation.

Management
Total compensation for key executives as a group is less than 3m of which 1.2m is for Elliot jr & sr. Elliot jr. has been with the company since the mid ninetees; he is the CEO. Elliot sr. has been making asphalt at Gencor since anyone cares to remember.
The board own 15% of all available shares. They have a big incentive to give results to shareholders.

Risks
Gencor has the risks of any manufacturer of capital equipment
– It has no clear barriers to entry
– The business is seasonal as well as cyclical
– The interest of the Elliot family may not be aligned with the interest of other stockholders.
– the company is now on its third CFO in two years.

The opportunity exists because
A) The current outlook for infrastructure spending is not good.
— IMO the USA can postpone maintenance of its roads but it is unlikely to do so indefinately.
B) It is unclear what management plans to do with the mountain of excess liquid assets that have been on the balance sheet since 2005.
— The company intends to evaluate the acquisition of other companies and assets that would complement or expand the Company’s existing businesses or broaden its customer relationships. Although it is unclear if acquisitions (if any) will be in the best interest of shareholders, it is clear that management has a good long-term record. Management has increased book value per share at more than 20% since 2000. The only down year has been 2009. The company sells for .8 x book.
C) The Company’s officers and directors own almost all of the Company’s Class B stock and are entitled to elect 75% of the members of its Board of Directors. This concentration may have the effect of delaying or preventing a change in control.
— The company is controlled by the Elliot family. Now that would be a bad thing if it were badly managed. I have found no evidence that management is overpaying itself or siphoning off cash. Were I to own all shares, I would not be able to find better managers for this company.

Disclosure : Author has a position in GENC.

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Posted in GENC, NASDAQ
2 comments on “Gencor Industries
  1. […] passed by. Three of the elite stocks that came under my attention and stayed in are Fortress Paper, Gencor Industries and Jewett-Cameron. The last one of them released its fiscal year 2011 annual report earlier this […]

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