Kreisler Manufacturing - KRSL
Today's idea is very simple. Kreisler Manufacturing is a profitable, cash generating manufacturer with an over-capitalized balance sheet. Kreisler's market perception suffers from the results of some poor decision-making a few years back, but the company has fully recovered from its mistakes. Once the market recognizes Kreisler's restored earnings power and excess assets, the company's market price may rise to reflect its value.
Kreisler Manufacturing provides pipe and tube assemblies and manifolds for aerospace and industrial turbine applications. The company is based in New Jersey and has been in business since 1968. Throughout the late 90s and into the mid-2000s, Kreisler's business was plagued with low margins and the company posted continual losses. However, Kreisler's fortunes would change. From 2005 to 2008, Kreisler's revenues rose 103%, gross margins nearly quintupled and net income climbed from near break-even to just under $2 million in 2007 and 2008. Cash piled up, accounting for 36% of assets in 2008 against nearly no debt and leases.
Things were looking bright for Kreisler, but then two things happened. One, the financial crisis came along and crimped revenues and margins. Revenue slumped 19% between and 2008 and 2010, but gross profits cratered, falling 77%. (It seems likely that Kreisler bid for projects at razor-thin margins just to keep its factory running and its workers employed.) However, despite the difficulties posed by the severe recession, Kreisler's worst wound was self-inflicted. In 2010, Kreisler decided to set up a manufacturing facility in Poland. Kreisler invested millions in the venture. The Polish government also kicked in multiple millions in grants to encourage the development. The project was a disaster. Despite spending millions on facilities and equipment, the Polish subsidiary produced only endless operating losses, crushing Kreisler's profits from 2010 on.
Kreisler finally pulled the plug on the boondoggle in 2012, selling the entire subsidiary for a pittance. (Literally less than you likely have in your wallet at the moment.) Kreisler wrote down the subsidiary's entire value and also off-loaded some liabilities in the process. The resulting loss pushed the company's reported net income to negative $2.8 million in 2012. Yet, this large reported loss disguised a strong recovery at Kreisler's domestic operations. Despite reporting the $2.8 million loss in 2012, the company's continuing operations actually earned $2.34 million in 2012.
Since writing off its Polish operations and re-focusing on the domestic business, Kreisler has thrived. Gross margins have rebounded to around 15%, while operating margins are hovering around 10%. Revenues have fallen off slightly since 2012, but the company has been able to maintain its margins, protecting profitability.
Most significantly, Kreisler' has produced serious cash flow since the exit from Poland. Some of this cash flow was due to one-time items like a large tax refund, but the greater credit is due to better working capital management. Kreisler's inventory levels are sitting at 47 days of trailing sales, compared to a high of 108 days of trailing sales in 2010. Due to the improved operating results and strong cash flow, Kreisler's balance sheet has never been stronger.
Of Kreisler's $9.19 million in cash and short-term assets, at least $7 million is likely excess. Kreisler could distribute or otherwise spend down $7.36 million in cash before its current ratio hit 2.50, still a very healthy buffer.
At Kreisler's current share price, the market is largely ignoring this surplus cash. Kreisler appears to trade at 11.1x trailing earnings, but the company really trades at only 6.9x earnings once excess cash is netted out. The company also looks very cheap on EV/EBITDA and EV/EBIT, coming in at 4.2x and 4.5x respectively.
Though Kreisler looks very cheap on a trailing earnings basis, two questions remain.
1. Will Kreisler's earnings hold up? Defense contractors account for a large portion of the company's revenues, and a reduction in defense spending could reduce demand for the company's pipes, tubes, and turbines. With the US backing off from more than a decade of war footing and with every budget item drawing close scrutiny, the possibility of reduced demand is real.
2. What will Kreisler do with its excess cash? That cash is only worth face value or more if it is used productively for the benefit of shareholders. If the cash is squandered in poor investments or simply allowed to languish on the balance sheet forever, returns to shareholders will be reduced. Kreisler seems to have gotten the message about blowing capital on risky foreign ventures. The company paid a 50 cent special dividend at the end of 2013. There's a lot of cash left to use before we can conclude it's been allocated effectively, but the chances of another massive and ultimately failed expansion seem low.
In my view, the risks of declining revenues and poor use of the company's cash are outweighed by the extremely low valuation and strong balance sheet.
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