Saturday, April 22, 2006
Some companies from the past: NICK, MEOH, CTAS, KEM, SJM, AAON, GWR
NICK (sec) sub-prime auto lender. I made good money on it. I still follow it. I think it's still a reasonable investment. They do a very good job of tracking loans in static pools. The CEO/founder was an engineer who just sort of stumbled into that industry and he applies the rigorous methods of engineering. The only CEO I know who posts messages on their own company's Yahoo message board. Like so many companies I looked at, this was a VIC writeup (so were some of the ones below).
The net interest rate spread they get is over 20%. The provisions are very high and routinely, when the static pools drain below a certain point, a lot of those reserves pour back into earnings. The company is run in batten-down mode preparing for downturns.
MEOH (website) world's largest methanol producer (at least they were when I owned them). Canadian. They reached close enough to full value for me in, I think it was early 2005. However, the price of methanol keeps going up and the company is very well run. 2005 results. A good place to park money outside of the US dollar.
CTAS (sec) uniforms. Not cheap, but strong balance sheet, not bad cash flow.
KEM (sec) tantalum capacitors and other passive electronic parts. Also VSH and AVX. It's one of those cyclical companies you buy when everyone thinks the sky is falling. I haven't followed them in years. The problem is that they're very capital intensive and they have low margins. This is another one of those supply/demand scenarios... and it hasn't worked out as I expected. I don't know, China could probably kill them. Maybe that's their problem nowadays.
SJM (sec) Smuckers. I briefly owned them years ago. It was $18 a share. I always thought they weren't run all that well. Solid brand, mediocre management. Latest quarter results show they're capital intensive, probably a serial acquirer (although some of those might be good acquisitions). The point is, everything they buy simply dilutes their one solid brand. I remember when they bought the natural peanut butter company and the synergy of peanut butter and jelly was just too funny. Free cash flow is weak. I don't think I'd be interested in them in the future.
AAON (sec) quality industrial air conditioners. I correctly sold them in 2002 at full price. Their 10-K came out last month. Wal*Mart is still their biggest customer, but they're now down to less than 10% of total sales (from 14% in 2004 and 18% in 2003). Wal*Mart likes them because the total cost of ownership is supposedly lower than Trane: the units are more expensive but last longer, from what I heard. Trouble is, AAON is dependent on copper and aluminum raw materials and could get squeezed if prices go up a lot: they're on the wrong side of the commodities equation. Revenues have been climbing, but gross profits are flat (they're going back up, fortunately) and SG&A is climbing. They expanded into Canada. Very strong balance sheet. Steady share count (very few options). But free cash flow stinks due to continuously expanding AR and inventories and high capex. If these guys get slammed by a downturn with skyrocketing commodity prices, it might be worth looking at again.
GWR (sec) Genesee and Wyoming: short line railroads. They were buying up small freight short lines years ago and now have railroads in US, Canada, Mexico, Australia, and Bolivia. 10-K for 2005: They're selling their Western Australia operations for US$956 million. It looks like they paid US$334 million for it in 2000. They want to buy up contiguous or nearby railroads to what they already have.
Revenues and traffic are up in just about every category in every region. Carloads are up, revenue per carload is up. Australian carloads are down, but revenues are up on each line. They acquired a lot of lines in 2005 (see table on page 23).
2001: $174 million
2002: $210 million
2003: $245 million
2004: $304 million
2005: $385 million (growth due to both acquisitions and organic growth)
Net income per diluted share:
2003: $0.77 ($0.68 per diluted share)
2004: $1.03 ($0.90 per diluted share)
2005: $1.36 ($1.20 per diluted share)
The total debt jumped up quite a bit in 2005 (presumably due to acquisitions).
I really like the way they break down the results to make it easier to understand what's going on in the business. I liked the management when I looked at them years ago. Dilution from options etc. isn't much historically.
Balance sheet: Total assets grew to $981 million from $677 million. That's a huge increase and should make shareholders consider the various issues associated with rapid growth. Most of the increase went into PP&E, as expected. Debt increased quite a bit as well. The debt to equity ratio is a bit less than 1.
Income statement: operating margin is 18.4% (up from 16.4%). Interest expense as a percentage of operating income actually dropped to 21% vs 22% in 2004.
Cash flow from operations is good, but capex is consistently larger than depreciation. Cash flow from ops is lower due to having much of the earnings as unconsolidated international affiliates (which I would view as just fine without more details). AR has been increasing lately, but so has AP. Acquisitions dwarf operations in terms of cash moving around. They borrowed a net $200 million in 2005, but not in prior years.
So GWR is expanding by raising their debt level, plus whatever funds come from operations. When I looked at them before, I was ok with their expansion strategy. So what are they worth? Maybe $25? It's selling for $36.21, so I'm not interested now. A downturn might be tough for them. Long term economic expansion would be very good, and that's the thing here. My long term view of the global economy is quite bullish. Short term, I have no idea. If we do have a down turn, this would be the type of company I'd want to scoop up cheap for something like $10.
UPDATE 4/23/06: I updated the revisiting companies 12 post with the GACF 10-K.