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CNRD - Conrad Industries


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http://www.conradindustries.com/images/logo.jpg

 

For most value investors, this company needs no introduction.:

 

http://www.frankvoisin.com/2011/02/10/conrad-industries-inc-cnrd/

http://www.creditbubblestocks.com/search/label/CNRD

http://seekingalpha.com/symbol/cnrd.pk

http://saharainvesting.wordpress.com/2012/12/19/conrad-industries/

http://www.portfolio14.com/search/label/cnrd

 

This company has had a very nice run since...well...2009, but still the company is pretty damn cheap:

 

Market cap: ~$180M

Enterprise Value: ~$120M

 

EBITDA (YTD): $20M

Net income (YTD): ~$12M

 

EBITDA (2012): $35M

Net income (2012): ~$20M

 

 

Backlog very strong:

 

During the first six months of 2013, Conrad added $152.0 million of backlog to its new construction segment compared to $89.9 million added to backlog during the first six months of 2012. Backlog was $181.8 million at June 30, 2013, $120.7 million at December 31, 2012 and $57.2 million at June 30, 2012.

 

Competent and shareholder friendly (owner operator) management. Declared special dividend last year and conducted buybacks too. Reduced float aggressively.

 

Moat: Due to US laws, all vessels transporting products between US ports must be constructed in US shipyards, owned and crewed by US citizens. This protects CNRD from international competition.

 

Hidden value: BP Settlement claim (of justifiable merit) at $22.6M. Morgan City Shipyard purchased in 1948 is at cost on balance sheet.

 

If the company can run at same rate for rest of 2013, as it did in first 6 months of 2013, EV/EBITDA would be 3. This is excluding BP settlement.

 

Sale possible, but don't hold your breath on it:

 

"Our board has authorized management to retain a financial advisor to our board to assist in its evaluation of strategic initiatives in order to determine potential alternatives that will enhance shareholder value and provides us with flexibility to respond to potential future business opportunities and risks."

 

It may seem counter-intuitive to be buying after such a run but cheap is cheap and deserves a look on pullback.

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I bought it around a year ago.It is family run business, churning out cash and nice FCF.

CNRD gave a $2.00 special dividend last year.The management is very conservative which will use FCF to reward shareholders rather than going for acquisitions.

The backlog up huge.

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First concern is Jones Act is very important to this business. What Congress giveth, congress can taketh away. Without that regulatory protection, this industry could easily migrate offshore to cheaper locations of manufacturing. How likely do you think it is for this 1920's Jones Act to continue in its current form without being amended or repealed?

 

Second concern is whether the global shipping industry is in oversupply. Reports indicate that to be the case http://www.seanews.com.tr/article/worldship/109258/

If this is true, I would imagine that the cycle for this industry is a long one i.e. it will take a long time for the oversupply to be cured.

 

Oversupply could cause prices to come down hence revenue comes down. Jones Act repeal/reform/amendment could mean the US manufacturers have a cost disadvantage. Margins could compress and EBITDA could come down.

 

Valuation may trump this concern, but IMO it is good to be aware of these risks.

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In my view, it is extremely unlikely that the Jones Act will be changed substantially.

 

1. The act supports jobs in the US shipping industry that would be lost if the act were repealed or changed. Any politician who suggested doing so would immediately be set on with accusations of killing American jobs and hindering the economy.

 

2. The shipbuilding sector has extremely high strategic value. Part of the purpose of the Jones Act was to assure that the nation would always have enough domestic shipbuilding capacity to support a war effort.

 

3. The Jones Act (or more accurately, section 27 of the Merchant Marine Act of 1920) is relatively obscure and not likely to be at the forefront of any politician's mind. The US lacks a natural contingency that would lobby for any substantial changes to the act. Any lobbying effort would meet with strong opposition from the representatives of states with large shipbuilding industries and the large defense companies which own domestic shipyards.

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First concern is Jones Act is very important to this business. What Congress giveth, congress can taketh away. Without that regulatory protection, this industry could easily migrate offshore to cheaper locations of manufacturing. How likely do you think it is for this 1920's Jones Act to continue in its current form without being amended or repealed?

 

Second concern is whether the global shipping industry is in oversupply. Reports indicate that to be the case http://www.seanews.com.tr/article/worldship/109258/

If this is true, I would imagine that the cycle for this industry is a long one i.e. it will take a long time for the oversupply to be cured.

 

Oversupply could cause prices to come down hence revenue comes down. Jones Act repeal/reform/amendment could mean the US manufacturers have a cost disadvantage. Margins could compress and EBITDA could come down.

 

Valuation may trump this concern, but IMO it is good to be aware of these risks.

 

Having owned CNRD in my fund for three years (and having followed it since it deregistered in 2005), it is a pleasure to watch intrinsic value continually rising.  Nearly each quarter I realize my estimate was too conservative.  I would agree with those who say it is highly unlikely that the Jones Act is eliminated in the next 10-20 years.  There is a national security element involved if all private work for US shipyards becomes uneconomical.  Anyways, at $30 per share with no debt and $10 per share in cash and current EPS of $4+ annually you are not paying for what happens 20+ years away.  It is entirely possible that in two years they have $20 in net cash ($10 existing plus $4 in EPS each year and proceeds from BP claim). 

 

Nor am I overly concerned about the oversupply in the shipping market since that largely refers to dry bulk and oil tankers, neither of which CNRD is involved in.  CNRD builds barges, tug boats, tow boats, ferries, lift boats and aluminum crew/supply vessels.  As far as I know the ferries are on the small end of the spectrum. 

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  • 7 months later...

2013 Annual report. At first glance results are the way I like them: nothing exciting. No update about the BP claim. Revenue up 30% Y/Y, net profit up 37% and backlog up 25%. Growth is mostly due to the energy segment, revenue there almost tripled in 2013:

 

The increase in commercial customer demand has been driven largely by customers acquiring barges to transport petroleum products resulting from the use of horizontal drilling in conjunction with hydraulic fracturing, which has expanded the ability of producers to recover natural gas and oil from low-permeability geologic plays, particularly shale plays.

 

The Jones act + US energy boom was an unforeseen (at least I was clueless :) ) combination of circumstances for those lucky enough to buy this a while ago. "Unfortunately" the stock doubled in 2013 and doesn't look extremely cheap anymore. Looks like management agrees with that - they didn't buy back stock in 2013.

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  • 3 months later...
  • 3 weeks later...

Latest quarterly: http://www.otcmarkets.com/financialReportViewer?symbol=CNRD&id=125080 .

 

Revenue up, net income up, backlog slightly down, BP settlement keeps dragging on. Boring and good. I agree that it isn't _extremely_ cheap anymore but I'm not selling yet. Still $10 / share in cash, mgmt seems capable & keeps delivering and some nice tailwinds from the shale gas boom. Not my best idea anymore but am glad to hold until I find something else.

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This is one of those rare stocks that I've bought more of as its risen in price, and haven't sold a share.  I bought about 70% of my position in the 12-14 range.  I bought another 25% or so in the 16-18 range because of the increased aggressiveness with capex and stock repurchases seen in the 2011 AR indicating to me their confidence in the business. 

 

The remaining 5% or so I just recently purchased; started buying again in the recent pullback around $38.  Backing out the cash on hand, the combination of the earnings multiple and ROI metrics are back in the 99th percentile of the 8000+ stocks on my screener. 

 

1.  Its back in the 99th percentile of my EBIT + ROI screen on 8000+ stocks.  I use a modified version of Joel Greenblatt's "magic formula" where I take an average of the last 3 years, plus a street forecast (if available), weighting each year, and then use that as an indication of EBIT for multiple & ROI purposes.

2.  Management is committed to returning capital to shareholders either via share repurchases or special dividends

3. recently paid of debt, now debt free

4.  Protected industry (jones act)

5.  tightly controlled company whose majority owners/management have aligned incentives.

6.  Additionally management has appeared to act fairly in the past towards minority owners

7.  capacity has greatly expanded over the last couple years wiith capex campaigns

8.  Potential BP settlement

 

My FV is now $54.

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  • 2 months later...

Any opinion on latest release?

 

EPS down, but it really seems to be concentrated in the Repair segment which saw a -$5 swing ($4.4 -> -$0.6) in Gross Profit. The other segment, Construction, was strong +$2.4 swing ($7.3 -> $9.7) in GP. Biz did slow some and they are accumulating barges in inventory. Oddly, other things I read say incremental shale oil production growth is still enormous. Possibly just cautious customers?

 

No divi, but close to $11/sh in cash. They still express faith in their BP claim, but nothing on the BS for it and they admit it'll be very slow. They are considering what to do with all the cash...possibly build capacity to sell vessels to emerging markets?

 

Still crazy cheap ex-cash, but hard to handicap what they do with it.

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Still many things to like here but I am still not rebuying the shares I sold at $42.

 

With capacity up quite a bit and sales declining (only one data point but it makes sense given their big chunk of gulf O&G business) I believe there is a good potential they swing to losses again.

 

That said, it is a much better business with better control of variable costs and less competition than six or seven years ago.  If it trades below book I would certainly buy my shares back.  The fact that they are building stock barges suggests that the construction business at least is expected to remain firm.

 

Will be interesting to see if they do another special dividend this year.  With sales down and BP still resisting the payout, they might skip it, given how conservative they are with cash.  Could see sub-$30 if that happens and fairly quickly.  On the other hard, they could restart the buyback.

 

Anybody see anything else going on here?

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  • 4 weeks later...

Conrad announces $1 special dividend, $0.25 quarterly dividend, increased backlog, sale of stock barges, and increased buyback authorization.  On the negative side lower oil prices are expected to impact the next few quarters, they are expanding into additional markets.

 

http://finance.yahoo.com/news/conrad-industries-announces-special-dividend-213000281.html

 

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Conrad announces $1 special dividend, $0.25 quarterly dividend, increased backlog, sale of stock barges, and increased buyback authorization.  On the negative side lower oil prices are expected to impact the next few quarters, they are expanding into additional markets.

 

http://finance.yahoo.com/news/conrad-industries-announces-special-dividend-213000281.html

Solid news. Wondering how smart expanding in additional markets is. Thought that their competitive advantage was primarily that other countries cannot compete in the US market because of the Jones act. So now they want to build vessels for emerging markets and compete with low wage countries?

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  • 5 months later...

Last quarterly: link. Results were not spectacular. Cashflow has been lacking but their backlog isn't dropping spectacularly.

 

During the first three months of 2015, we added $52.5 million of backlog, as compared to $59.3 million added in the first three months of 2014, which includes double-skinned tank barges, deck barges and the LNG bunker barge. Our backlog was $171.9 million at March 31, 2015, $180.2 million at December 31, 2014 and $155.8 million at March 31, 2014.

 

One interesting tidbit: the company seems to think shares are currently undervalued (?) and started buying back shares again. Combined with the newly initiated quarterly dividend they return quite some money to shareholders. Good to see.

 

During April 2015, we purchased 65,507 shares at an average price of $31 per share. As of April 30, 2015, $18 million remained available under the program.
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  • 2 months later...

Near term results are going to be poor due to lower demand for barges and lower demand for GoM maintenance and repair work.  In addition, I question the company's capital allocation.  They had years to buy back shares on the cheap, but failed to do so. 

 

Most importantly, I think it's hard to say what the returns are going to be for the massive investments they've been making (and continue to make).  As a general matter, I think Conrad's returns on incremental invested capital is likely to be lower than ROIC over the last five years, because they have land that is recorded on their books for far less than its market value.  Are you certain that the large investments the company has made recently and is currently making will earn rates of return that significant exceed its cost of capital?  If not, there's no reason this should trade far above book value. 

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I like Conrad's management, but I'm not so sure that their expansion plans are a good idea. I wonder if they will continue with their buybacks. Back in 2008 they were buying back shares at the then all-time high, only to stop when shares subsequently hit rock bottom.

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I think you guys are being a bit harsh.  They have repurchased 20% of their shares over the last 7 years at an average price of $15 per share.  That number is higher due to the last few quarters when they were repurchasing at $31.  Over those 7 years they have paid $5.50 per share in total dividends.  Yes they should have been buying back shares in 2009 but that is true of nearly everyone.  The 800k shares they repurchased in 2008 at around $12 was a great deal.  They would have paid out nearly half that in dividends already. 

 

You may be right on the expansion.  They wouldn't be the first company to expand at the top.  My take is they are broadening their offerings.  The LNG bunker barge could be the first of many. 

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I think you guys are being a bit harsh. 

 

You may be right, but they have been awash in cash for a long time.  I understand that they're a family owned firm that wants to be conservatively financed, but they could have done better.  And, even at current prices, much of the bull case has to be based on the returns the company is projected to generate on its recent capex. 

 

You're correct that they're investing to broaden their offerings by going after bigger types of ships, but who knows what the returns on those new lines of business will be?  Moreover, those new lines of business can carry new risks as well, such as errors in estimating costs having bigger impacts the bigger the project is.  (Lamprell is an example of a company that made a mess of things in just that way.)   

 

All in all, I don't think the company is a terrible investment at current prices.  But I don't think it's a screaming buy either. 

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They have repurchased 20% of their shares over the last 7 years at an average price of $15 per share.

 

Its not just that they have repurchased 20% of their shares -- share issuance has been almost nil (38,400 shares on authorized shares of ~7.3 million).  For most public companies, a big chunk of repurchases first goes to absorbing share issuance to insiders.  CNRD's repurchases have gone almost entirely to reducing shares outstanding.

 

To their credit, they also stopped their buybacks for most of 2013-2014 when their shares were at recent all-time highs (high 30s - low 40s).  They had the cash to both fund their capex and buyback shares -- but they wisely decided not to buy shares and retained cash on the balance sheet.

 

I think their issuance/repurchase track record speaks very highly of their management team.  They can't control the external forces that are currently hurting their business, but I think these guys are smart operators in what is looking like a tough business environment over the next few years.  They've been through it before.

 

wabuffo

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I tend to agree with Tim here...I think some of these reactions are rather harsh.  I think this company definitely ranks highly right now compared to other investment opportunities out there in the marketplace...not only from a valuation basis but a management integrity basis.  Finally, on an absolute basis I'm confident I'll make at least a double-digit annualized return from here over the next decade. 

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We shouldn't have any illusion. This is a cyclical business. The "flaw" of the timing of their capex is very well captured by the Cobweb model. This is what Buffett called "institutional imperative" when he talked about people in the insurance business always grabbing market shares at the wrong time.

 

I've been completely out for some time. I like the management. At some point, CNRD will be cheap again.

 

https://en.wikipedia.org/wiki/Cobweb_model

http://www.portfolio14.com/2012/12/ships-hogs-dirts-and-shipbuilder-called.html

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