As we expected based on comments from competitors and customers, Conrad Industries reported an excellent third quarter of 2012 [pdf].
There were a number of good areas: increased earnings, increased earnings per share, increased margins, increased backlog, share repurchases, the BP/DWH claim and the increase in energy business. We'll go over all those and then some valuation notes.
"For the quarter ended September 30, 2012, Conrad had net income of $4.4 million [up 26%] and earnings per diluted share of $0.74 [up 37%] compared to net income of $3.5 million and earnings per diluted share of $0.54 during the third quarter of 2011. The Company had net income of $12.9 million and earnings per diluted share of $2.13 for the nine months ended September 30, 2012 compared to net income of $12.4 million and earnings per diluted share of $1.93 for the nine months ended September 30, 2011."Excellent news! The really interesting part is that revenue was only up 1.4% quarter over quarter, but margins increased from 10.9% to 13.2% (the biggest increase in the repair business), which is what drove the increase in net income. Then, earnings per share grew faster than net income because of accretive stock repurchases. The increased backlog looks really bullish,
"During the first nine months of 2012, Conrad added $183.5 million of backlog to its new construction segment compared to $135.8 million added to backlog during the first nine months of 2011. Backlog at September 30, 2012 was $104.4 million [up 19%] compared to $87.7 million at September 30, 2011, $47.1 million at December 31, 2011, and $57.2 million at June 30, 2012. The Company has signed $58.7 million of new contracts since September 30, 2012."That is a huge increase! Up 19% year-over-year not counting the $60 million signed after the end of the quarter. That's a total backlog of $163 million which means about $22 million in gross profit at the current margin of 13.2 percent.
During the third quarter of 2012, 150,000 shares were purchase for an average price of $15 per share, and the share count is now 5,938,287. That was 2.5% of the float (5% of the public shares) in just one quarter. I think it's appropriate now to think that there is a "put" at roughly book value, which seriously changes how to think about position sizing using the Kelly criterion (because a lot of downside is taken off the table).
Shareholder equity increased to $105.2 million. At December 31, 2007 (just after the last economic cycle peak), it was $43.5 million. That's a compounded growth rate of 20% through a depression!
Cash from operations YTD was $16.4 million. The company spent $13 million on capital expenditures (including the land purchase) and $3.15 million (almost all the rest) on share repurchases. I wonder whether we can expect them to spend the lion's share of free cash flow on share repurchases going forward as long as the shares are cheap?
Another potential source for a huge share repurchase, tender offer, or special dividend is any money received from the BP/DWH claim. The company disclosed much more about this in the Q3 report,
"We are preparing to submit claims to the BP Settlement Fund in accordance with the Deepwater Horizon Court–Supervised Settlement Program. We plan to submit these claims to the BP Settlement Fund by November 30, 2012, and estimate a response before the end of the first half of 2013. Certain of our businesses are located within the economic zones included in the class settlement and we believe that the damage calculations have been made in accordance with the guidelines established for the BP Settlement Fund. The cumulative amount of the claims is anticipated to be approximately $22 million to $23 million. Although we believe that these claims have been calculated in accordance with the guidelines established by the BP Settlement Fund, the claims are still subject to review by the professionals responsible for processing the claims and determining the amount to be awarded for each claim. Accordingly, the amounts awarded to us may be less than the amounts we submit and some or all of our claims may be rejected. In addition, a fairness hearing for the class settlement was held November 8, 2012, and no final decision has yet been entered. Any award we receive will be subject to income taxes. No amounts related to the claims have been recorded in our financial statements at September 30, 2012."The BP claim could mean $3.70 to $3.87 in one-time additional cash per share, less taxes ($2.41-$2.5,net).
Not only might the company be able to recover most of its foregone profits from 2010, but the upsurge in energy business (which we predicted) is already starting to show. The company said that energy related business increased to 11.9% of revenue for the first nine months of 2012 compared to 7% for the year ended December 31, 2011. They said that the increase in new construction backlog is "primarily related to spending for double-skinned tank barges and various other barges."
Thinking now about valuation. EBITDA for the quarter was $7.9 million.The ttm EBITDA is now $34.3 million and trailing two-year average EBITDA is $31.2 million. If you assume the company has about $25 million in unneeded working capital, then the enterprise value is $80 million. So the current EV/EBITDA is an incredibly cheap 2.4x. [If you count all the cash and assume the company gets the full BP/DWH settlement, the metric is 1.4x EBITDA.] The P/E ratio ex-cash is 4.2x, an earnings yield of 24 percent.
Another value investor points out that, "CNRD is trading well below the [comparable] buyout value of Todd Shipyards. In early 2011, Todd Shipyards was acquired by Vigor Industrial for 4.5x EV/LTM EBITDA or 8.9x EV/5-year average EBITDA."
If you assume a 4.5x EBITDA multiple on a "normalized" EBITDA of $30 million, the stock would be worth $28, not counting any potential BP/DWH claim. That also does not count the accretive effect of additional share repurchases at lower multiples, nor does it consider that the company should do closer to $40 million EBITDA over the next twelve months.
I mentioned earlier my theory that the Conrad share market consists of three different groups: the company itself, some dumb money holders that are net sellers (the original IPO investors?), and savvy value investors. I think, in the main, trading has consisted of the company and value investors slowly buying out the dumb money. At some point, the dumb money (people who think this should trade at under 4x earnings ex-cash) will have sold out, and the float will consist of savvy investors who realize that the company compounded shareholder equity at 20 percent annually, without using leverage, during a 5 year period that contained a depression.
At that point, the valuation could quickly re-rate higher. I think this is stupid cheap under $20 (like people didn't even read the results yet).