Portfolio Updates Part One
|Apr 3, 2013|
It's April and that means annual reports! I can't wait to start receiving those manuals in my mailbox, especially those from dark companies that report only to shareholders. Who knows what gems (or duds) I will find?
Many of the more communicative companies I have discussed on this blog have already provided their quarterly or annual reports to the public. Now is a good a time as any to take a look at those companies, and to do some housekeeping on the "Idea Tracker" list. Because I've written up over thirty companies so far, I am going to break this list into four parts.
QEP Company has been disappointing to say the least. When I originally profiled the company, QEP was experiencing sales and earnings growth and was steadily reducing its debt. Then trouble struck at the company's largest customer began squeezing QEP's margins before eventually informing the company it would be ceasing purchases of certain products beginning in fiscal 2014. QEP has responded by acquiring multiple smaller companies in an effort to expand its product lines to recover lost margins, increasing its debt along the way.
QEP continues to profit, but its outlook is murky and will depend on the success of its acquisitions. I will be monitoring the company closely for stabilization in its gross margins and discipline on its levels of debt. If either trend continues to deteriorate, the company will be removed from the ideas tracker, presumably as a failed idea.
McRae, on the other hand, has been exceptional! Mcrae's business is robust, chalking up orders from the US and Israeli governments while seeing its Western-style boot lines remain popular. The company has been generous with shareholders, paying regular and special dividends and repurchasing stock. And its share price has been on fire, providing a total return of 92% in just 14 months. McRae's valuation remains reasonable at 9.4 times trailing earnings and 1.04 times book value. The company has no debt and holds $11.65 million in cash, equal to 21% of its market capitalization.
My only criticism of the company is its recent decision to invest in land. Land investments are highly unlikely to provide a return in excess of the company's cost of capital. I'd much rather see the company increase its dividend or better yet, buy back stock. However, the company's land investment is small in comparison to its balance sheet and shareholders certainly cannot complain about recent returns. McRae's valuation still looks attractive, but the company is no longer as extraordinarily cheap as it was last year.
Webco has suffered from slowing demand and challenging pricing, resulting in reduced profits. However, free cash flow has been strong and has allowed the company to reduce debt from $103 million in October, 2011 to $76 million in January, 2013 . The company completed its new $55 million plant in Sand Springs, Oklahoma in mid-2012. With this large capital project completed, future cash flows can be devoted to further debt reduction or additional projects.
Webco's EV/EBITDA of 4.76 and P/E of 6.4 are very reasonable, though they are based on trailing figures. If the steel market does not pick up soon, these ratios will rise. The company now trades at 62% of book value despite a strong record of profitability. Even though the short-term steel market may be challenging, Webco's discount to its assets strong track record may still appeal to long-term investors.
Alaska Power & Telephone
AP&T continues to hum along, gradually reducing its leverage and churning out profits. Since I originally wrote, AP&T's equity-to-assets ratio has improved from 27.3% to 28.2%. Modest, but moving in the right direction. Net debt has declined from $61.7 million to $55.9 million. The company quietly re-instated a dividend in October, 2012 and now yields 2.2%. Trailing P/E is 8.4, which is low for a utility company in a low interest rate world. Free cash flow generation for the trailing four quarters was very strong, amounting to 22.9% of market capitalization.
AP&T's annual report will be out later this month and I expect more of the same. Alaska Power & Telephone is not going to double or triple overnight, but the company makes a good lower-risk holding.
Steel Partners Holdings, LP
Steel Partners uplisted to the NYSE in April, 2010, so I don't keep up with the company like I used to. Net asset value for the partnership at the time of my writing was $18.02 per unit. Steel Partners no longer reports a monthly NAV, but the company's 10-K reports partners' capital per unit of $17.13. Part of the decline is due to a large number of units issued per a management agreement. Warren Lichtenstein has been busy, acquiring Steel Partners' control of companies including Steel Excel and DGT Holdings.
Units currently trade hands at $13.25, a 22.7% discount to partners's capital per unit. An investment in Steel Partners Holdings is a "jockey" bet that Mr. Lichtenstein can repeat his historical success, and that he will treat shareholders fairly. Investors must also hope Mr. Lichtenstein's attention is not diverted by relationship drama, as Google informs me he and reality TV "star" Bethenny Frankel may be an item.
Speaking of drama, the reverse split debacle with Advant-E Corp. seems to have faded, at least for now. The abusive reverse split scheme concocted by the company's management was yanked only 13 days after the company's 13E3 document was filed. Perhaps the company feared a class action by disenfranchised shareholders? I'm not against reverse splits, when the compensation to be received by small shareholders is fair. Advant-E's proposal was not remotely fair. In its annual report, the company indicates it still plans to go ahead with a plan to reduce its shareholder base and deregister with the SEC. Let's hope the new plan will adequately compensate all investors.
Corporate actions aside, Advant-E continues to thrive. In 2012, revenues rose 5.4% and profits rose 16.9%. The company repurchased 10% of shares outstanding and paid a 2 cent special dividend. The trailing P/E is now 7.7 and 6.4 net of cash.
Detrex Corp. continues to lavish shareholders with dividends, paying out a total of $4.25 in dividends since the sale of its Harvel Plastics subsidiary. Unfortunately, earnings have been less rosy. Pre-tax income for the quarter ended September 30, 2012 declined 51% from a year earlier and environmental remediation costs rose. The company assured investors its finances are strong and indicated it is "exploring strategic opportunities to enhance shareholder value." In November, Detrex added John C. Rudolph of Glacier Peak Capital to its board of directors.
The crux of Detrex's valuation is its environmental liabilities. At present, environmental expenses are holding down operating income to the tune of $3 million per year. Take that away and you have a much, much more profitable enterprise. Detrex's environmental issues will eventually be resolved, but the question is how much more in earnings will be consumed first? Investors looking forward to the eventual resolution of these environmental issues may find a very cheap, high quality manufacturer in Detrex.
Siem's share price has risen with the market, up about 16.5% since my writeup. The company continues to suffer from the conglomerate discount, as well as from its extreme illiquidity. The value of Siem's publicly-traded holdings has declined modestly to $125.29 per share. A large part of the decline stems from the Norwegian Krone's decline against the US Dollar. Still, the value of these holdings is 66% higher than Siem's recent trading price.
In late 2012, Siem took action to monetize a portion of its largest holding, SubSea 7. Siem sold $445 million in 1% senior secured exchangeable bonds. These bonds are exchangeable for SubSea 7 stock at a price 30%+ higher than SubSea 7's trading price. The bonds are due in 2019. This is essentially a bond issue combined with a covered call, and it seems like a great move for Siem. By issuing the bond, Siem gets to play with $445 million for six years at a cost of only $4.5 million per year. Yes, the company may have to part with shares in SubSea 7, but only at a large premium to current prices. Even if Subsea 7 shares do appreciate enough for bondholders to exchange, Siem will retain 62.3% of its SubSea 7 shares and the $445 million in cash.
Siem Industries shares trade at 56.8% of book value. What is would take to close this gap is unclear. Share repurchases are not an option given Siem's illiquidity and the fact that Christian Siem already owns more than 90% of shares outstanding. Investors in Siem must be content to let value be its own catalyst.
Of all the companies that declared special dividends in late 2012, Mestek may be the most generous of all! Mestek bestowed shareholders with a massive $3 per share dividend, thanking them for their loyalty and patience through a difficult period in the machinery and construction markets. Meanwhile, Mestek has delivered solid performance, earning $11.23 million ($1.51 per share) in the four quarters since my post on the company. Mestek's trailing P/E is 9.4. When the market for Mestek's products eventually turns around, that ratio could drop quickly as earnings increase. Until then, an investment in Mestek looks quite reasonably priced. Plus, one could hardly ask for a more shareholder-focused management team.
I own shares in Webco Industries, Alaska Power & Telephone, Advant-E Corp., Detrex Corp. and Mestek Inc.