CONRAD INDUSTRIES INC CNRD
December 23, 2013 - 11:52am EST by
bentley883
2013 2014
Price: 36.25 EPS $4.19 $4.42
Shares Out. (in M): 6 P/E 8.7x 8.2x
Market Cap (in M): 216 P/FCF 27.8x 8.5x
Net Debt (in M): 0 EBIT 37 40
TEV: 169 TEV/EBIT 4.6x 4.2x

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  • High ROIC
  • Highly Cash Generative
  • Shipping
  • History of shareholder friendliness
 

Description

Investment Overview: Conrad Industries is a classic "Magic Formula" small/micro cap stock (moderately high ROIC and attractive earnings yield), that I believe is selling below intrinsic value with upside of ~25%-30% with a free call option on a legal claim and has a reasonable margin of safety. The Company has: a 16% ROIC, rich cash flow business model, rock solid balance sheet (with cash constituting ~ 22% of the share price), a couple of tailwinds aiding growth prospects and a shareholder friendly management team that has proven to be a good allocator of capital. While the share price has outperformed the recent market rally in the last 12-18 months, the shares are still selling at an attractive valuation on a number of measures: including a EV/EBITDA multiple of 4x, a FCF/EV yield of 17% and a cash adjusted P/E of 6.4x, all on ttm results. While I believe that Conrad will continue to experience healthy growth during the next 18-24 months, at current share prices investors are not paying for this growth. I believe the shares are selling about 20%-25% below intrinsic value of $45-$48 per share, representing potential appreciation of 25%-35%.

Company Profile: Conrad Industries, established in 1948 and headquartered in Morgan City, Louisiana, designs, builds and overhauls tugboats, ferries, liftboats, barges, offshore supply vessels and other steel and aluminum products for the oil & gas, commercial and government markets. The company provides both repair and new construction services at its five shipyards located in southern Louisiana and Texas. The marine vessels the Company builds and repair, are used primarily in the domestic inland waterways or the intracoastal waters of the Gulf of Mexico.

Statistics:

Symbol: CNRD

Date: 12/23/13

Price: $36.25

Avg. Daily Volume: 6,120 shs.

Market Cap: $216M

Net Cash/(per share): $47M ($7.88)

Enterprise Value: $169M

TTM Revenues: $277.2M

TTM EBITDA: $42.2M

TTM FCF: $28.6M

TTM EPS: $4.43

Key Investment Points: The following points underscore my opinion as to why the share price is attractive and selling below intrinsic value:

A Good & Sustainable Business: Conrad has a ~65 year history of operations and has grown from a single shipyard to five locations through a combination of internal growth/expansion and acquisitions. During the last decade the Company has invested heavily and successfully diversified its business to build/repair a broader range of vessels and service a more diversified range of customers. Historically, Conrad primary served customers in the oil & gas industry in the Gulf of Mexico. In the 2003/04 time frame the company embarked on an effort to both expand its capacity and diversify its business to new customers. Unfortunately this diversification effort came at a bad time when industry growth slowed significantly during this time. This resulted in the company recording meaningful losses during this period. However, the end result of these efforts has been to transform Conrad into a more diversified company with a broader and well balanced customer base. The importance here is that these different customers not only provide more growth opportunities, but they remove some of the volatility of the company's financial results during an industry downturn in a particular sector. This was clearly evident during the recent 2008/09 downturn, helping the company remain profitable and able to generate a healthy amount of cash flow. Conrad’s recent diversification efforts in the last few years to target the inland waterways market and commercial customers has been a major catalyst to the Company’s growth.   

Conrad Industries, Inc                          
Customer Segments                          
                          9 Mths.
  2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Revenues:                          
Oil & Gas 31,332 24,368 12,369 12,658 14,610 55,429 72,976 52,349 28,262 14,439 17,252 37,848 60,239
Government 5,488 8,164 16,447 13,995 25,341 19,492 10,955 27,130 26,964 19,577 42,637 17,990 648
Commercial 10,084 8,492 4,613 10,468 24,695 46,902 84,605 111,576 88,966 104,825 186,566 177,792 155,024
  Total Revenues 46,904 41,023 33,429 37,121 64,646 121,823 168,535 191,054 144,192 138,841 246,454 233,630 215,911
                           
% of Total Revenues:                          
Oil & Gas 66.8% 59.4% 37.0% 34.1% 22.6% 45.5% 43.3% 27.4% 19.6% 10.4% 7.0% 16.2% 27.9%
Government 11.7% 19.9% 49.2% 37.7% 39.2% 16.0% 6.5% 14.2% 18.7% 14.1% 17.3% 7.7% 0.3%
Commercial 21.5% 20.7% 13.8% 28.2% 38.2% 38.5% 50.2% 58.4% 61.7% 75.5% 75.7% 76.1% 71.8%
                           
Growth:                          
Oil & Gas   -22.2% -49.2% 2.3% 15.4% 279.4% 31.7% -28.3% -46.0% -48.9% 19.5% 119.4% 193.8%
Government   48.8% 101.5% -14.9% 81.1% -23.1% -43.8% 147.7% -0.6% -27.4% 117.8% -57.8%     NM
Commercial   -15.8% -45.7% 126.9% 135.9% 89.9% 80.4% 31.9% -20.3% 17.8% 78.0% -4.7% 14.3%
  Total Revenues   -12.5% -18.5% 11.0% 74.1% 88.4% 38.3% 13.4% -24.5% -3.7% 77.5% -5.2% 25.3%

While the business is somewhat cyclical and impacted by general economic conditions in the region as well as business conditions in the oil & gas markets. The Company competes with a handful of medium sized shipyards in the region and has "Jones Act" protection from foreign manufacturers. Conrad has a history of healthy growth and conservative management. The Company has an attractive financial model, with ROIC of ~15%-20%, ROE of 20%, and healthy FCF generation.

Industry Tailwinds Driving Growth: While general economic conditions influence demand for the Company's products and services, there are two significant tailwinds that are driving near-term growth. Conrad is a prime beneficiary of the on-going oil & gas boom in the Midwest and the transportation of product inland via barges. An aging US inland barge fleet (some reports indicate the average age is +20 years) is driving a major industry wide cap-x cycle focused on retiring old vessels and upgrading the fleet to new double hulled and larger capacity barges. The research I have done suggests that this factor should continue to be a favorable catalyst to demand over at least the next 12-18 months. Noteworthy in this regard are the comments from senior executives of Kirby Corp (KEX), a leading provider of marine transport services for the inland and coastal markets which appear to support this viewpoint:

Joseph Pyne - Chairman, President and Chief Executive Officer: “The marine business is a cyclical business. I've been in it over 35 years and I am seeing not a number of cycles, but several cycles. What we're seeing today is different and it's different because, for about 30 of those years, we were essentially in a very slow growth business, business that would grow at about GDP and maybe a little less GDP. With the energy renaissance in the U.S. and the need to move crude oil, gas condensate and the significant improved compatibility of the chemical business on a global basis, you have demand that frankly I don't think that we've seen in this business, the 30 plus years. So your typical cyclicality trends are going to be different here because you've got volumes that are actually growing. Now, with respect to which inning you're in, I think that you could make a pretty good argument that you're at the beginning innings in the coastal business. And maybe a little further along on the inland business, the only qualifier I'd put there is that on the coastal side, you're really not building much equipment, on the inland side you are adding capacity, and that capacity is being absorbed, is being absorbed as we speak.”

Gregory Binion - President, Marine Transportation Group: “In terms of announced construction….. even, if we were to start tomorrow, you're talking almost two years, before you get delivery of a unit. So we've got some legs yet to go on this.”

The second tailwind that the Company is benefiting from has been the recent resurgence in business from oil & gas customers (primary for higher margin repair work). This appears to be correlated with to the easing of drilling permit restriction in the Gulf of Mexico following the BP Deepwater Horizon oil spill in April 2010. Following the accident, permitting for new deep water exploration was curtailed until October 2010, when new safeguards & restrictions were adopted. Data from the US Bureau of Safety Environmental Enforcement (which was formally established on October 2011 as part of a major reorganization of the Department of the Interior's offshore regulatory structure), show the number of revised new deepwater (>500 feet) exploration permits in The Gulf of Mexico were 3, 127, 283 & 319 in the years 2010, 2011, 2012 & 2013 (ytd). The report can be accessed thru the following link:

http://www.bsee.gov/Exploration-and-Production/Permits/Status-of-Gulf-of-Mexico-Well-Permits/

In addition, data from the Baker Hughes Offshore Rig Count Report shows the increase in exploration activity in the Gulf of Mexico. For the full year to date, the average number of offshore rigs is up about 18% on a year over year basis. The following is a link to the report/chart:

http://gis.bakerhughesdirect.com/Reports/YearToYearCompChart.aspx?chrtName=rigOffshoreChrt

The impact of this increase in oil & gas exploration in the Gulf of Mexico has had a favorable impact on Conrad’s revenues from this segment of customers, which until recently had been the Company’s major source of sales. Revenues from oil & gas customers, which had dropped to ~5% of revenues in 2011/12, now constitute ~25%-30% of revenues during 2013. These customers tend to have a disproportional impact on the Company’s repair business, which tends to have higher margins than it’s new construction business.

As a result of these favorable tailwinds to demand, Conrad has seen a significant increase in its order backlog, which as of the latest report, is up ~50% y/y and now stands at record levels. In addition to continued improvement in the domestic economy, another potential driver of future demand would be rule changes to allow barge transportation of fracking waste, which the U.S. Coast Guard is currently proposing.

Conrad Industries
Backlog vs. Revenue Trends
         
    ttm ttm ttm
Date Backlog ($M) Backlog ($M) Revenue ($M) Bklg./Rev.
11/13/13 188.3 162.0 69.3 234%
Q3 -2013 152.3 145.1 69.3 209%
Q2 - 2013 181.8 133.1 64.3 207%
Q1 - 2013 125.5 100.7 60.8 166%
Q4 - 2012 120.7 87.0 58.4 149%
Q3 - 2012 104.4 68.6 58.8 117%
Q2 - 2012 52.2 64.5 58.5 110%
Q1 - 2012 70.8 73.6 58.8 125%
Q4 - 2011 47.1 84.0 61.6 136%
Q3 - 2011 87.7 94.6 55.8 170%
Q2 - 2011 88.7 94.2 48.7 193%
Q1 - 2011 112.3 82.2 43.3 190%
Q4 - 2010 89.5 66.4 34.7 191%
Q3 - 2010 86.1 53.6 32.4 165%
Q2 - 2010 41.0 46.1 32.4 142%
Q1 - 2010 48.9 45.9 30.8 149%
Q4 - 2009 38.3 42.2 36.0 117%
Q3 - 2009 56.1 50.6 41.2 123%
Q2 - 2009 40.4 55.3 44.3 125%
Q1 - 2009 34.1 68.7 49.4 139%

New Additions To Capacity Coming On-line: Over the last 24 months the Company has invested a significant amount of its FCF back into the business in the form of growth cap-ex to both expand its capacity, broaden its manufacturing & repair capabilities and increase its efficiency. In the 10 years prior to 2012, cap-ex averaged about $4.5M per year (combination of maintenance & growth related). However, in 2012 the company re-invested over $15M in cap-ex and this year the amount should be ~$20M. Highlighting the investments the Company has been making during the last 24 months, cap-ex has been running in excess of 4x D&A over this period. In addition to equipment purchases, refurbishments and enlarging its dry-docks, as well as building an indoor construction facility, the company purchased a new parcel of land adjacent to one of its facilities and constructed its fifth shipyard. While this new facility will add to Conrad’s revenue generating capabilities, it will enable the Company to construct and repair bigger vessels and expand its business to new markets/customers. This capacity has just begun to come on-line in 2H of this year, which should help Conrad turn its growing backlog more rapidly into revenues. While management has not discussed its cap-ex plans for 2014, I suspect they will return to more normalized levels, favorably impacting FCF generation.

Cash Rich Balance Sheet: Given the combination of a conservative management team coupled with the Company's healthy FCF generation, Conrad has a rock solid balance sheet rich in cash with minimal debt. Despite the re-investments made in growth cap-ex over the past two years, along with the payment of a special dividend and some share repurchases, the Company's net cash position has about doubled in the last 24 months. At the end of the September quarter net cash had grown to $9.88 per share; representing ~28% of the current share price. Following the payment of a $2.00 per share special dividend on December 17th, the net cash position has declined slightly to $7.88 (excluding potential FCF generation during Q4), or ~22% of the share price.

In addition to a rock solid net cash position, I believe that Conrad’s book value could be somewhat understated by the value on the books of the Company’s land holdings. Reviewing the escalated cost of land expansion purchases (in 2003, 52 acres were purchased for $1.3M, while in 2012, 50 acres were purchased for $5.6M) and Conrad’s accounting for land dating back a couple of decades on the Company's books at cost, suggests that Conrad's book value may be conservative. This would make the Company’s assets more valuable to any outside interested party.

Free Call Option On Potential Legal Claim: In December 2012 and February 2013, the Company submitted claims totaling $22.6 million to the BP Settlement Fund in accordance with the Deepwater Horizon Court Supervised Settlement Program. Certain of the Company's businesses are located within the economic zones included in the class settlement. The outcome and timing of when these claims will be decided is uncertain and has already been delayed. Originally management had expected a resolution by the end of 2013. Recent indications from press reports suggest that BP has objected to the formula used by the court administrator and is seeking more documentation from each company filing a claim. Thus, while full or partial payment is uncertain, the potential award ($3.79 pre-tax) could provide a meaningful increase to cash balances. I suspect that if the full amount of the claim is realized, management would consider another special dividend to shareholders.

Conservative & Shareholder Friendly Management: The Conrad family owns 47% of the stock and three generations of the family are in the management ranks, with the Company founder J. Parker Conrad (age 97) Co-Chairman, John P. Conrad (age 70) CEO & Co-Chairman. Thus, given that management is not overpaid and does not have a lot of stock options, they are very much aligned with shareholders in increasing wealth through share appreciation. From my perspective, management is somewhat conservative and backed by past history, not likely to do anything stupid with the cash (i.e. a big acquisition or move away from their core business). They also have a good track record of capital allocation and being shareholder friendly. In the past the Company has reinvested its cash back into the business or made timely acquisitions of a few shipyards in the region, which have provided healthy financial returns. Also, management has used excess cash to repurchase shares and pay two special dividends (in 2012 and 2013). The only criticisms that can be made of management are the decisions to remain a non-SEC filer (for cost reasons) and to not hold quarterly conference calls or give investor presentations (to focus on running the business). However, the Company's financial reports contain more disclosures than many, and I have found management open to discussions of the business fundamentals.

A noteworthy point regarding management is the age of both J. Parker Conrad and John P. Conrad. While there is a third generation Conrad working at the Company, it is unclear of whether he is part of the Company’s management succession plan and if/how soon he would be ready to run the business. This raises the possibility of a potential sale of the Company (something management has not given any indication it is considering) sometime in the future. Sources I have spoken with indicate that given the Company’s excellent reputation and presence in the industry/region, there would likely be interested buyers.   

Financial History & Projections: Conrad's historic annual P&L results along with my forecasts are illustrated in the following table. The numbers show the cyclical nature of the business. In addition, further volatility in the financial results were caused by a number of additional factors. From the 1999 period when Conrad operated just two facilities and was focused primarily on the Gulf of Mexico oil & gas industry, the company's growth over the next few years was driven by: an expansion in the number of facilities, moving its dry docks to larger facilities, broadening the product mix (including a move into the aluminum vessel business) and diversifying its customer base. These expansion efforts coincided to some degree with the post-9/11 downturn in the economy and weakness in the oil & gas industry during the late 2001 thru 2004 period. Beginning in late 2005 and lasting through 2008, the combination of improved economic conditions, higher oil & gas prices and the impact of hurricanes Katrina, Rita, Gustav and Ike combined to create an unusually strong lift to both demand and pricing. The business turned down with the economy, financial/credit crisis in late 2008 and continued soft following the Deepwater Horizon accident and subsequent weakness in the oil & gas industry in 2010. The combination of an improving economy, Conrad’s diversification into the inland market and the addition of new capacity has helped fuel a significant recovery in the Company’s business beginning in 2011.

Looking out to the future, given the combination of the tailwinds fueling the Company’s demand coupled with its record backlog and new capacity coming on-line, it is reasonable to expect that Conrad’s revenues will likely grow from current Q3 (September) quarter levels in future quarters. However, in an effort to maintain a conservative posture (and a margin of safety), I have chosen to use a no revenue growth model for future forecasting purposes. As a value investor, I like growth, but don’t want to pay for it if possible. Given that the Company’s backlog is at record levels on both an absolute basis and as a percent of revenues, I would not be surprised if the total backlog were to decline from current levels over the next few quarters. From the standpoint of profitability, both 2013/14 should result in record EPS on both a GAAP and operating cash flow basis. FCF, should rebound in 2014 to ~$25 million (or ~$4.20 per share) as cap-ex spending will likely decline to a level slightly above maintenance cap-ex levels. The following tables illustrate my GAAP and FCF estimated for 2013/14 profitability under this zero revenue growth scenario.

 

Calendar Year                           
Conrad Industries                          
  2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012 2013E 2014E
                           
Net Sales  $41,023  $33,429  $37,121  $64,646  $121,823  $168,535  $191,054  $144,192 $138,841 $246,454 $233,630 $298,738 $331,308
Cost of Goods 35,657 32,770 37,104 60,577 107,530 133,282 149,231 119,017 118,092 211,918 196,497 254,714 283,008
Gross Profit 5,366 659 17 4,069 14,293 35,253 41,823 25,175 20,749 34,536 37,133 44,024 48,300
 Gross Margin 13.1% 2.0% 0.0% 6.3% 11.7% 20.9% 21.9% 17.5% 14.9% 14.0% 15.9% 14.7% 14.6%
                           
SG & A 4,815 4,702 4,296 3,081 3,568 4,791 5,480 6,250 4,780 5,416 6,408 7,273 7,984
% of rev 11.7% 14.1% 11.6% 4.8% 2.9% 2.8% 2.9% 4.3% 3.4% 2.2% 2.7% 2.4% 2.4%
Operating Expenses 4,815 4,702 4,296 3,081 3,568 4,791 5,480 6,250 4,780 5,416 6,408 7,273 7,984
% of rev 11.7% 14.1% 11.6% 4.8% 2.9% 2.8% 2.9% 4.3% 3.4% 2.2% 2.7% 2.4% 2.4%
                           
Operating Profit 551 (4,043) (4,279) 988 10,725 30,462 36,343 18,925 15,969 29,120 30,725 36,751 40,316
 Operating Margin 1.3% -12.1% -11.5% 1.5% 8.8% 18.1% 19.0% 13.1% 11.5% 11.8% 13.2% 12.3% 12.2%
                           
D&A 1,861 2,175 2,471 2,395 2,430 2,485 3,020 3,324 3,459 3,619 4,067 4,756 5,963
EBITDA 2,412 (1,868) (1,808) 3,383 13,155 32,947 39,363 22,249 19,428 32,739 34,792 41,507 46,279
% of Sales 5.9% -5.6% -4.9% 5.2% 10.8% 19.5% 20.6% 15.4% 14.0% 13.3% 14.9% 13.9% 14.0%
                           
Impairment Goodwill 0 4,000 4,101 0 0 0 0 0 0 0 0 0 0
Termin. Acq. Costs 350 0 0 0 0 0 0 0 0 0 0 0 0
                           
Interest Expense (221) (435) (585) (1,064) (1,214) (776) (484) (159) (96) (50) (37) (30) (28)
Other Income (Expense) 39 36 163 172 2 440 173 771 348 867 830 1,588 240
                           
Net Income Before Taxes   (Reported) 19 (8,442) (8,802) 96 9,513 30,126 36,032 19,537 16,221 29,937 31,518 38,309 40,528
Net Income Before Taxes (Operating) 369 (4,442) (4,701) 96 9,513 30,126 36,032 19,537 16,221 29,937 31,518 38,309 40,528
                           
Income Taxes 23 (1,613) (1,681) (15) 3,618 10,917 13,023 6,688 5,936 10,770 10,676 13,327 14,185
  Tax Rate 121.1% 19.1% 19.1% -15.6% 38.0% 36.2% 36.1% 34.2% 36.6% 36.0% 33.9% 34.8% 35.0%
                           
Net Income (Reported) (4) (6,829) (7,121) 111 5,895 19,209 23,009 12,849 10,285 19,167 20,842 24,981 26,343
Net Income (Operating) 346 (2,829) (3,020) 111 5,895 19,209 23,009 12,849 10,285 19,167 20,842 24,981 26,343
                           
                           
EPS (reported, basic) ($0.00) ($0.94) ($0.98) $0.02 $0.81 $2.65 $3.31 $2.00 $1.60 $3.01 $3.46 $4.19 $4.42
EPS (operating, basic) $0.05 ($0.39) ($0.42) $0.02 $0.81 $2.65 $3.31 $2.00 $1.60 $3.01 $3.46 $4.19 $4.42
                           
Shares Out. (FD) 7,230 7,234 7,236 7,236 7,236 7,236 6,949 6,439 6,448 6,368 6,029 5,960 5,961
                           
Revenues                          
  Y/Y % Growth   -19% 11% 74% 88% 38% 13% -25% -4% 78% -5% 28% 11%
                           
Operating Income                          
  Y/Y % Growth   -834% 6% -123% 986% 184% 19% -48% -16% 82% 6% 20% 10%
                           
Net Income                          
  Y/Y % Growth   170625% 4% -102% 5211% 226% 20% -44% -20% 86% 9% 20% 5%

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Conrad Industries
Cash Flow Analysis & Projections
                   
  2006 2007 2008 2009 2010 2011 2012        2103E         2014E
Net Income 5,895 19,209 23,009 12,849 10,285 19,167 20,842 24,981 26,343
D&A 2,430 2,485 3,020 3,324 3,459 3,619 4,067 4,756 5,963
Adjustments 2,844 334 1,342 324 (1,174) 1,478 (520) (151) 0
Working Capital 952 (14,573) 3,558 (10,872) (1,160) 5,327 18,157 121 (980)
Cap-ex (2,230) (5,098) (5,892) (4,676) (2,901) (4,302) (15,293) (21,970) (6,000)
FCF 9,891 2,357 25,037 949 8,509 25,289 27,253 7,737 25,326

Attractive Valuation: While the stock price of Conrad has outperformed the market during the current rally, the shares are still attractively priced on a number of measures. I believe that the tailwinds that have helped the Company's expansion in the past few years, will continue to drive growth over the next 18-24 months and that the capacity additions coming on-line in 2H of 2014 will translate into further increases in profitability and FCF during this period. However, given the cyclical nature of the business and the desire to be conservative, I can make a case that the shares are attractive based on both ttm data and down cycle profitability. Based on ttm data, the shares are valued at a EV/EBITDA multiple of 4x, a FCF/EV yield of 17% and a cash adjusted P/E of 6.4x. For cyclical companies, it is always helpful to look at how they are valued relative to their down cycle profitability. In 2009, like many companies, Conrad was faced with a weak economy and a major financial crisis. In addition, the Company's business (especially vessel repair) was impacted by the BP Deepwater Horizon spill, which had a significant impact on the exploration activities in the Gulf of Mexico and Conrad's oil & gas business. At current prices, the shares are selling at an EV/EBITDA multiple of ~7x and a cash adjusted P/E of ~13x on its cyclical though 2009 earnings. I believe these attractive multiples on down cycle profitability provide investors a healthy margin of safety.

Conrad Industries
Enterprise Value Calculation
   
Stock Price $36.25
+   Shares Out. (mil.) 5,961
=   Mkt. Cap. (mil.) $216.1
   
- Cash  (60.2)
+ STD 0.3
 + LTD 1.0
+   Special Dividend 11.9
=   Ent. Value (mil.) $169.1

The Share Are Selling Significantly Below Intrinsic Value: I believe the shares are selling at about 20%-25% below intrinsic value of $45-$48 per share. In calculating intrinsic value, I believe I am using a conservative set of assumptions. First, while I believe the combination of a record backlog and additional capacity additions should bode well for some growth over the next few quarters, I am using a no revenue growth (from Q3-2013 levels) scenario in forecasting profitability and FCF for my intrinsic value calculation. In addition, a fair amount of my analysis is based using trailing twelve month (ttm) numbers. Thus, as illustrated in the analysis below, looking out approximately 12 months and estimating the Company can conservatively generate FCF in 2014 of ~$25 million with cash reserves increasing commensurately, and assuming the share can command a reasonable EV/FCF multiple of 8x (still implying an attractive 12.5% yield) would equate to a share price of ~$46.50 per share. Note assuming a multiple of 10x (or a 10% yield) would equate to a share price of ~$55 per share.

Conrad Industries
Potential Share   Price Analysis
($ million)
   
Current Cash 60.2
-   Special Dividend (11.9)
- STD (0.3)
 - LTD (1.0)
 +   Q4 2013 Cash Additions 5.0
+ Cash Additions in 2014 25.0
Net Cash @ 12/2014 77.0
   
   
2014 FCF Estimate 25
Assume 8x EV/FCF Multiple  200
   
+   Net Cash @ 12/2014 77.0
=   Market Cap. 277.0
/   Shares Out. (Mil.) 5,961
Share Price $46.47

Relative to a private market valuation, there are not a lot of comparisons to look at. The closest comparison is the December 2011 acquisition of Seattle based Todd Shipyards by Portland ship-builder Vigor Industrial LLC. for about $130 million in cash. This equated to a valuation of about 5.3x EBITDA and 9.4x EPS. However, Todd was primarily in the repair business, with limited manufacturing capability, and derived ~95% of its revenue from government contracts. Additionally, Todd appeared to have about half the number of dry-docks and construction bays and does not appear to have made the investments that Conrad has to modernize its facilities and equipment. From a financial standpoint, while the revenue base of Todd at the time of acquisition is about similar in size, Conrad has a higher return, richer FCF business model that Todd. For example, at the time of its acquisition Todd’s EBITDA margin of ~9.5% trails the mid-teens margin of Conrad and Todd’s three year average FCF is about 1/3rd that of the Company. Applying the same EBITDA and EPS multiples to Conrad translates to prices of about $45 and $40 respectively. Noteworthy, these valuation measures were accorded in a depressed market environment, with a subsequent 45% rise in the S&P 500 index since the date of the acquisition. Thus given the combination Conrad’s higher return business model, more modern facilities, more diversified customer base, the improved economy and a higher public market, I believe it is reasonable to accord some premium to these numbers.

Thus, when triangulating this data, it leads me to an intrinsic value for Conrad of $45-$48 per share, which represents upside potential of 25%-35%.

Why Are The Shares Mis-Priced?: I believe the shares are mis-priced due to the following: non-SEC filer (due to cost issues, but they release all financials), no conference calls (but management has been very accessible), no sell-side analyst coverage (i.e. they don't need investment banking) and that the Company does not screen well due to temporary growth cap-x cycle in 2012/13 (likely ending in 2013).

Risks: Another economic downturn, a significant/prolonged drop in WTI oil prices, a sharp rise in steel prices, competitive pricing pressures, loss of a major customer (the top 10 customers comprise ~2/3rds of revenue) and a weather event (i.e. hurricane).

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Continued growth in earnings and cash flow.
  • A reduction in growth cap-ex, which will aid free cash flow and help the stock screen better.
  • A favorable resolution from the Company's legal claim regarding the BP Deepwater Horizon oil spill.
  • Possible sell-side analyst coverage.
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    Description

    Investment Overview: Conrad Industries is a classic "Magic Formula" small/micro cap stock (moderately high ROIC and attractive earnings yield), that I believe is selling below intrinsic value with upside of ~25%-30% with a free call option on a legal claim and has a reasonable margin of safety. The Company has: a 16% ROIC, rich cash flow business model, rock solid balance sheet (with cash constituting ~ 22% of the share price), a couple of tailwinds aiding growth prospects and a shareholder friendly management team that has proven to be a good allocator of capital. While the share price has outperformed the recent market rally in the last 12-18 months, the shares are still selling at an attractive valuation on a number of measures: including a EV/EBITDA multiple of 4x, a FCF/EV yield of 17% and a cash adjusted P/E of 6.4x, all on ttm results. While I believe that Conrad will continue to experience healthy growth during the next 18-24 months, at current share prices investors are not paying for this growth. I believe the shares are selling about 20%-25% below intrinsic value of $45-$48 per share, representing potential appreciation of 25%-35%.

    Company Profile: Conrad Industries, established in 1948 and headquartered in Morgan City, Louisiana, designs, builds and overhauls tugboats, ferries, liftboats, barges, offshore supply vessels and other steel and aluminum products for the oil & gas, commercial and government markets. The company provides both repair and new construction services at its five shipyards located in southern Louisiana and Texas. The marine vessels the Company builds and repair, are used primarily in the domestic inland waterways or the intracoastal waters of the Gulf of Mexico.

    Statistics:

    Symbol: CNRD

    Date: 12/23/13

    Price: $36.25

    Avg. Daily Volume: 6,120 shs.

    Market Cap: $216M

    Net Cash/(per share): $47M ($7.88)

    Enterprise Value: $169M

    TTM Revenues: $277.2M

    TTM EBITDA: $42.2M

    TTM FCF: $28.6M

    TTM EPS: $4.43

    Key Investment Points: The following points underscore my opinion as to why the share price is attractive and selling below intrinsic value:

    A Good & Sustainable Business: Conrad has a ~65 year history of operations and has grown from a single shipyard to five locations through a combination of internal growth/expansion and acquisitions. During the last decade the Company has invested heavily and successfully diversified its business to build/repair a broader range of vessels and service a more diversified range of customers. Historically, Conrad primary served customers in the oil & gas industry in the Gulf of Mexico. In the 2003/04 time frame the company embarked on an effort to both expand its capacity and diversify its business to new customers. Unfortunately this diversification effort came at a bad time when industry growth slowed significantly during this time. This resulted in the company recording meaningful losses during this period. However, the end result of these efforts has been to transform Conrad into a more diversified company with a broader and well balanced customer base. The importance here is that these different customers not only provide more growth opportunities, but they remove some of the volatility of the company's financial results during an industry downturn in a particular sector. This was clearly evident during the recent 2008/09 downturn, helping the company remain profitable and able to generate a healthy amount of cash flow. Conrad’s recent diversification efforts in the last few years to target the inland waterways market and commercial customers has been a major catalyst to the Company’s growth.   

    Conrad Industries, Inc                          
    Customer Segments                          
                              9 Mths.
      2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
    Revenues:                          
    Oil & Gas 31,332 24,368 12,369 12,658 14,610 55,429 72,976 52,349 28,262 14,439 17,252 37,848 60,239
    Government 5,488 8,164 16,447 13,995 25,341 19,492 10,955 27,130 26,964 19,577 42,637 17,990 648
    Commercial 10,084 8,492 4,613 10,468 24,695 46,902 84,605 111,576 88,966 104,825 186,566 177,792 155,024
      Total Revenues 46,904 41,023 33,429 37,121 64,646 121,823 168,535 191,054 144,192 138,841 246,454 233,630 215,911
                               
    % of Total Revenues:                          
    Oil & Gas 66.8% 59.4% 37.0% 34.1% 22.6% 45.5% 43.3% 27.4% 19.6% 10.4% 7.0% 16.2% 27.9%
    Government 11.7% 19.9% 49.2% 37.7% 39.2% 16.0% 6.5% 14.2% 18.7% 14.1% 17.3% 7.7% 0.3%
    Commercial 21.5% 20.7% 13.8% 28.2% 38.2% 38.5% 50.2% 58.4% 61.7% 75.5% 75.7% 76.1% 71.8%
                               
    Growth:                          
    Oil & Gas   -22.2% -49.2% 2.3% 15.4% 279.4% 31.7% -28.3% -46.0% -48.9% 19.5% 119.4% 193.8%
    Government   48.8% 101.5% -14.9% 81.1% -23.1% -43.8% 147.7% -0.6% -27.4% 117.8% -57.8%     NM
    Commercial   -15.8% -45.7% 126.9% 135.9% 89.9% 80.4% 31.9% -20.3% 17.8% 78.0% -4.7% 14.3%
      Total Revenues   -12.5% -18.5% 11.0% 74.1% 88.4% 38.3% 13.4% -24.5% -3.7% 77.5% -5.2% 25.3%

    While the business is somewhat cyclical and impacted by general economic conditions in the region as well as business conditions in the oil & gas markets. The Company competes with a handful of medium sized shipyards in the region and has "Jones Act" protection from foreign manufacturers. Conrad has a history of healthy growth and conservative management. The Company has an attractive financial model, with ROIC of ~15%-20%, ROE of 20%, and healthy FCF generation.

    Industry Tailwinds Driving Growth: While general economic conditions influence demand for the Company's products and services, there are two significant tailwinds that are driving near-term growth. Conrad is a prime beneficiary of the on-going oil & gas boom in the Midwest and the transportation of product inland via barges. An aging US inland barge fleet (some reports indicate the average age is +20 years) is driving a major industry wide cap-x cycle focused on retiring old vessels and upgrading the fleet to new double hulled and larger capacity barges. The research I have done suggests that this factor should continue to be a favorable catalyst to demand over at least the next 12-18 months. Noteworthy in this regard are the comments from senior executives of Kirby Corp (KEX), a leading provider of marine transport services for the inland and coastal markets which appear to support this viewpoint:

    Joseph Pyne - Chairman, President and Chief Executive Officer: “The marine business is a cyclical business. I've been in it over 35 years and I am seeing not a number of cycles, but several cycles. What we're seeing today is different and it's different because, for about 30 of those years, we were essentially in a very slow growth business, business that would grow at about GDP and maybe a little less GDP. With the energy renaissance in the U.S. and the need to move crude oil, gas condensate and the significant improved compatibility of the chemical business on a global basis, you have demand that frankly I don't think that we've seen in this business, the 30 plus years. So your typical cyclicality trends are going to be different here because you've got volumes that are actually growing. Now, with respect to which inning you're in, I think that you could make a pretty good argument that you're at the beginning innings in the coastal business. And maybe a little further along on the inland business, the only qualifier I'd put there is that on the coastal side, you're really not building much equipment, on the inland side you are adding capacity, and that capacity is being absorbed, is being absorbed as we speak.”

    Gregory Binion - President, Marine Transportation Group: “In terms of announced construction….. even, if we were to start tomorrow, you're talking almost two years, before you get delivery of a unit. So we've got some legs yet to go on this.”

    The second tailwind that the Company is benefiting from has been the recent resurgence in business from oil & gas customers (primary for higher margin repair work). This appears to be correlated with to the easing of drilling permit restriction in the Gulf of Mexico following the BP Deepwater Horizon oil spill in April 2010. Following the accident, permitting for new deep water exploration was curtailed until October 2010, when new safeguards & restrictions were adopted. Data from the US Bureau of Safety Environmental Enforcement (which was formally established on October 2011 as part of a major reorganization of the Department of the Interior's offshore regulatory structure), show the number of revised new deepwater (>500 feet) exploration permits in The Gulf of Mexico were 3, 127, 283 & 319 in the years 2010, 2011, 2012 & 2013 (ytd). The report can be accessed thru the following link:

    http://www.bsee.gov/Exploration-and-Production/Permits/Status-of-Gulf-of-Mexico-Well-Permits/

    In addition, data from the Baker Hughes Offshore Rig Count Report shows the increase in exploration activity in the Gulf of Mexico. For the full year to date, the average number of offshore rigs is up about 18% on a year over year basis. The following is a link to the report/chart:

    http://gis.bakerhughesdirect.com/Reports/YearToYearCompChart.aspx?chrtName=rigOffshoreChrt

    The impact of this increase in oil & gas exploration in the Gulf of Mexico has had a favorable impact on Conrad’s revenues from this segment of customers, which until recently had been the Company’s major source of sales. Revenues from oil & gas customers, which had dropped to ~5% of revenues in 2011/12, now constitute ~25%-30% of revenues during 2013. These customers tend to have a disproportional impact on the Company’s repair business, which tends to have higher margins than it’s new construction business.

    As a result of these favorable tailwinds to demand, Conrad has seen a significant increase in its order backlog, which as of the latest report, is up ~50% y/y and now stands at record levels. In addition to continued improvement in the domestic economy, another potential driver of future demand would be rule changes to allow barge transportation of fracking waste, which the U.S. Coast Guard is currently proposing.

    Conrad Industries
    Backlog vs. Revenue Trends
             
        ttm ttm ttm
    Date Backlog ($M) Backlog ($M) Revenue ($M) Bklg./Rev.
    11/13/13 188.3 162.0 69.3 234%
    Q3 -2013 152.3 145.1 69.3 209%
    Q2 - 2013 181.8 133.1 64.3 207%
    Q1 - 2013 125.5 100.7 60.8 166%
    Q4 - 2012 120.7 87.0 58.4 149%
    Q3 - 2012 104.4 68.6 58.8 117%
    Q2 - 2012 52.2 64.5 58.5 110%
    Q1 - 2012 70.8 73.6 58.8 125%
    Q4 - 2011 47.1 84.0 61.6 136%
    Q3 - 2011 87.7 94.6 55.8 170%
    Q2 - 2011 88.7 94.2 48.7 193%
    Q1 - 2011 112.3 82.2 43.3 190%
    Q4 - 2010 89.5 66.4 34.7 191%
    Q3 - 2010 86.1 53.6 32.4 165%
    Q2 - 2010 41.0 46.1 32.4 142%
    Q1 - 2010 48.9 45.9 30.8 149%
    Q4 - 2009 38.3 42.2 36.0 117%
    Q3 - 2009 56.1 50.6 41.2 123%
    Q2 - 2009 40.4 55.3 44.3 125%
    Q1 - 2009 34.1 68.7 49.4 139%

    New Additions To Capacity Coming On-line: Over the last 24 months the Company has invested a significant amount of its FCF back into the business in the form of growth cap-ex to both expand its capacity, broaden its manufacturing & repair capabilities and increase its efficiency. In the 10 years prior to 2012, cap-ex averaged about $4.5M per year (combination of maintenance & growth related). However, in 2012 the company re-invested over $15M in cap-ex and this year the amount should be ~$20M. Highlighting the investments the Company has been making during the last 24 months, cap-ex has been running in excess of 4x D&A over this period. In addition to equipment purchases, refurbishments and enlarging its dry-docks, as well as building an indoor construction facility, the company purchased a new parcel of land adjacent to one of its facilities and constructed its fifth shipyard. While this new facility will add to Conrad’s revenue generating capabilities, it will enable the Company to construct and repair bigger vessels and expand its business to new markets/customers. This capacity has just begun to come on-line in 2H of this year, which should help Conrad turn its growing backlog more rapidly into revenues. While management has not discussed its cap-ex plans for 2014, I suspect they will return to more normalized levels, favorably impacting FCF generation.

    Cash Rich Balance Sheet: Given the combination of a conservative management team coupled with the Company's healthy FCF generation, Conrad has a rock solid balance sheet rich in cash with minimal debt. Despite the re-investments made in growth cap-ex over the past two years, along with the payment of a special dividend and some share repurchases, the Company's net cash position has about doubled in the last 24 months. At the end of the September quarter net cash had grown to $9.88 per share; representing ~28% of the current share price. Following the payment of a $2.00 per share special dividend on December 17th, the net cash position has declined slightly to $7.88 (excluding potential FCF generation during Q4), or ~22% of the share price.

    In addition to a rock solid net cash position, I believe that Conrad’s book value could be somewhat understated by the value on the books of the Company’s land holdings. Reviewing the escalated cost of land expansion purchases (in 2003, 52 acres were purchased for $1.3M, while in 2012, 50 acres were purchased for $5.6M) and Conrad’s accounting for land dating back a couple of decades on the Company's books at cost, suggests that Conrad's book value may be conservative. This would make the Company’s assets more valuable to any outside interested party.

    Free Call Option On Potential Legal Claim: In December 2012 and February 2013, the Company submitted claims totaling $22.6 million to the BP Settlement Fund in accordance with the Deepwater Horizon Court Supervised Settlement Program. Certain of the Company's businesses are located within the economic zones included in the class settlement. The outcome and timing of when these claims will be decided is uncertain and has already been delayed. Originally management had expected a resolution by the end of 2013. Recent indications from press reports suggest that BP has objected to the formula used by the court administrator and is seeking more documentation from each company filing a claim. Thus, while full or partial payment is uncertain, the potential award ($3.79 pre-tax) could provide a meaningful increase to cash balances. I suspect that if the full amount of the claim is realized, management would consider another special dividend to shareholders.

    Conservative & Shareholder Friendly Management: The Conrad family owns 47% of the stock and three generations of the family are in the management ranks, with the Company founder J. Parker Conrad (age 97) Co-Chairman, John P. Conrad (age 70) CEO & Co-Chairman. Thus, given that management is not overpaid and does not have a lot of stock options, they are very much aligned with shareholders in increasing wealth through share appreciation. From my perspective, management is somewhat conservative and backed by past history, not likely to do anything stupid with the cash (i.e. a big acquisition or move away from their core business). They also have a good track record of capital allocation and being shareholder friendly. In the past the Company has reinvested its cash back into the business or made timely acquisitions of a few shipyards in the region, which have provided healthy financial returns. Also, management has used excess cash to repurchase shares and pay two special dividends (in 2012 and 2013). The only criticisms that can be made of management are the decisions to remain a non-SEC filer (for cost reasons) and to not hold quarterly conference calls or give investor presentations (to focus on running the business). However, the Company's financial reports contain more disclosures than many, and I have found management open to discussions of the business fundamentals.

    A noteworthy point regarding management is the age of both J. Parker Conrad and John P. Conrad. While there is a third generation Conrad working at the Company, it is unclear of whether he is part of the Company’s management succession plan and if/how soon he would be ready to run the business. This raises the possibility of a potential sale of the Company (something management has not given any indication it is considering) sometime in the future. Sources I have spoken with indicate that given the Company’s excellent reputation and presence in the industry/region, there would likely be interested buyers.   

    Financial History & Projections: Conrad's historic annual P&L results along with my forecasts are illustrated in the following table. The numbers show the cyclical nature of the business. In addition, further volatility in the financial results were caused by a number of additional factors. From the 1999 period when Conrad operated just two facilities and was focused primarily on the Gulf of Mexico oil & gas industry, the company's growth over the next few years was driven by: an expansion in the number of facilities, moving its dry docks to larger facilities, broadening the product mix (including a move into the aluminum vessel business) and diversifying its customer base. These expansion efforts coincided to some degree with the post-9/11 downturn in the economy and weakness in the oil & gas industry during the late 2001 thru 2004 period. Beginning in late 2005 and lasting through 2008, the combination of improved economic conditions, higher oil & gas prices and the impact of hurricanes Katrina, Rita, Gustav and Ike combined to create an unusually strong lift to both demand and pricing. The business turned down with the economy, financial/credit crisis in late 2008 and continued soft following the Deepwater Horizon accident and subsequent weakness in the oil & gas industry in 2010. The combination of an improving economy, Conrad’s diversification into the inland market and the addition of new capacity has helped fuel a significant recovery in the Company’s business beginning in 2011.

    Looking out to the future, given the combination of the tailwinds fueling the Company’s demand coupled with its record backlog and new capacity coming on-line, it is reasonable to expect that Conrad’s revenues will likely grow from current Q3 (September) quarter levels in future quarters. However, in an effort to maintain a conservative posture (and a margin of safety), I have chosen to use a no revenue growth model for future forecasting purposes. As a value investor, I like growth, but don’t want to pay for it if possible. Given that the Company’s backlog is at record levels on both an absolute basis and as a percent of revenues, I would not be surprised if the total backlog were to decline from current levels over the next few quarters. From the standpoint of profitability, both 2013/14 should result in record EPS on both a GAAP and operating cash flow basis. FCF, should rebound in 2014 to ~$25 million (or ~$4.20 per share) as cap-ex spending will likely decline to a level slightly above maintenance cap-ex levels. The following tables illustrate my GAAP and FCF estimated for 2013/14 profitability under this zero revenue growth scenario.

     

    Calendar Year                           
    Conrad Industries                          
      2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012 2013E 2014E
                               
    Net Sales  $41,023  $33,429  $37,121  $64,646  $121,823  $168,535  $191,054  $144,192 $138,841 $246,454 $233,630 $298,738 $331,308
    Cost of Goods 35,657 32,770 37,104 60,577 107,530 133,282 149,231 119,017 118,092 211,918 196,497 254,714 283,008
    Gross Profit 5,366 659 17 4,069 14,293 35,253 41,823 25,175 20,749 34,536 37,133 44,024 48,300
     Gross Margin 13.1% 2.0% 0.0% 6.3% 11.7% 20.9% 21.9% 17.5% 14.9% 14.0% 15.9% 14.7% 14.6%
                               
    SG & A 4,815 4,702 4,296 3,081 3,568 4,791 5,480 6,250 4,780 5,416 6,408 7,273 7,984
    % of rev 11.7% 14.1% 11.6% 4.8% 2.9% 2.8% 2.9% 4.3% 3.4% 2.2% 2.7% 2.4% 2.4%
    Operating Expenses 4,815 4,702 4,296 3,081 3,568 4,791 5,480 6,250 4,780 5,416 6,408 7,273 7,984
    % of rev 11.7% 14.1% 11.6% 4.8% 2.9% 2.8% 2.9% 4.3% 3.4% 2.2% 2.7% 2.4% 2.4%
                               
    Operating Profit 551 (4,043) (4,279) 988 10,725 30,462 36,343 18,925 15,969 29,120 30,725 36,751 40,316
     Operating Margin 1.3% -12.1% -11.5% 1.5% 8.8% 18.1% 19.0% 13.1% 11.5% 11.8% 13.2% 12.3% 12.2%
                               
    D&A 1,861 2,175 2,471 2,395 2,430 2,485 3,020 3,324 3,459 3,619 4,067 4,756 5,963
    EBITDA 2,412 (1,868) (1,808) 3,383 13,155 32,947 39,363 22,249 19,428 32,739 34,792 41,507 46,279
    % of Sales 5.9% -5.6% -4.9% 5.2% 10.8% 19.5% 20.6% 15.4% 14.0% 13.3% 14.9% 13.9% 14.0%
                               
    Impairment Goodwill 0 4,000 4,101 0 0 0 0 0 0 0 0 0 0
    Termin. Acq. Costs 350 0 0 0 0 0 0 0 0 0 0 0 0
                               
    Interest Expense (221) (435) (585) (1,064) (1,214) (776) (484) (159) (96) (50) (37) (30) (28)
    Other Income (Expense) 39 36 163 172 2 440 173 771 348 867 830 1,588 240
                               
    Net Income Before Taxes   (Reported) 19 (8,442) (8,802) 96 9,513 30,126 36,032 19,537 16,221 29,937 31,518 38,309 40,528
    Net Income Before Taxes (Operating) 369 (4,442) (4,701) 96 9,513 30,126 36,032 19,537 16,221 29,937 31,518 38,309 40,528
                               
    Income Taxes 23 (1,613) (1,681) (15) 3,618 10,917 13,023 6,688 5,936 10,770 10,676 13,327 14,185
      Tax Rate 121.1% 19.1% 19.1% -15.6% 38.0% 36.2% 36.1% 34.2% 36.6% 36.0% 33.9% 34.8% 35.0%
                               
    Net Income (Reported) (4) (6,829) (7,121) 111 5,895 19,209 23,009 12,849 10,285 19,167 20,842 24,981 26,343
    Net Income (Operating) 346 (2,829) (3,020) 111 5,895 19,209 23,009 12,849 10,285 19,167 20,842 24,981 26,343
                               
                               
    EPS (reported, basic) ($0.00) ($0.94) ($0.98) $0.02 $0.81 $2.65 $3.31 $2.00 $1.60 $3.01 $3.46 $4.19 $4.42
    EPS (operating, basic) $0.05 ($0.39) ($0.42) $0.02 $0.81 $2.65 $3.31 $2.00 $1.60 $3.01 $3.46 $4.19 $4.42
                               
    Shares Out. (FD) 7,230 7,234 7,236 7,236 7,236 7,236 6,949 6,439 6,448 6,368 6,029 5,960 5,961
                               
    Revenues                          
      Y/Y % Growth   -19% 11% 74% 88% 38% 13% -25% -4% 78% -5% 28% 11%
                               
    Operating Income                          
      Y/Y % Growth   -834% 6% -123% 986% 184% 19% -48% -16% 82% 6% 20% 10%
                               
    Net Income                          
      Y/Y % Growth   170625% 4% -102% 5211% 226% 20% -44% -20% 86% 9% 20% 5%

    +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

    Conrad Industries
    Cash Flow Analysis & Projections
                       
      2006 2007 2008 2009 2010 2011 2012        2103E         2014E
    Net Income 5,895 19,209 23,009 12,849 10,285 19,167 20,842 24,981 26,343
    D&A 2,430 2,485 3,020 3,324 3,459 3,619 4,067 4,756 5,963
    Adjustments 2,844 334 1,342 324 (1,174) 1,478 (520) (151) 0
    Working Capital 952 (14,573) 3,558 (10,872) (1,160) 5,327 18,157 121 (980)
    Cap-ex (2,230) (5,098) (5,892) (4,676) (2,901) (4,302) (15,293) (21,970) (6,000)
    FCF 9,891 2,357 25,037 949 8,509 25,289 27,253 7,737 25,326

    Attractive Valuation: While the stock price of Conrad has outperformed the market during the current rally, the shares are still attractively priced on a number of measures. I believe that the tailwinds that have helped the Company's expansion in the past few years, will continue to drive growth over the next 18-24 months and that the capacity additions coming on-line in 2H of 2014 will translate into further increases in profitability and FCF during this period. However, given the cyclical nature of the business and the desire to be conservative, I can make a case that the shares are attractive based on both ttm data and down cycle profitability. Based on ttm data, the shares are valued at a EV/EBITDA multiple of 4x, a FCF/EV yield of 17% and a cash adjusted P/E of 6.4x. For cyclical companies, it is always helpful to look at how they are valued relative to their down cycle profitability. In 2009, like many companies, Conrad was faced with a weak economy and a major financial crisis. In addition, the Company's business (especially vessel repair) was impacted by the BP Deepwater Horizon spill, which had a significant impact on the exploration activities in the Gulf of Mexico and Conrad's oil & gas business. At current prices, the shares are selling at an EV/EBITDA multiple of ~7x and a cash adjusted P/E of ~13x on its cyclical though 2009 earnings. I believe these attractive multiples on down cycle profitability provide investors a healthy margin of safety.

    Conrad Industries
    Enterprise Value Calculation
       
    Stock Price $36.25
    +   Shares Out. (mil.) 5,961
    =   Mkt. Cap. (mil.) $216.1
       
    - Cash  (60.2)
    + STD 0.3
     + LTD 1.0
    +   Special Dividend 11.9
    =   Ent. Value (mil.) $169.1

    The Share Are Selling Significantly Below Intrinsic Value: I believe the shares are selling at about 20%-25% below intrinsic value of $45-$48 per share. In calculating intrinsic value, I believe I am using a conservative set of assumptions. First, while I believe the combination of a record backlog and additional capacity additions should bode well for some growth over the next few quarters, I am using a no revenue growth (from Q3-2013 levels) scenario in forecasting profitability and FCF for my intrinsic value calculation. In addition, a fair amount of my analysis is based using trailing twelve month (ttm) numbers. Thus, as illustrated in the analysis below, looking out approximately 12 months and estimating the Company can conservatively generate FCF in 2014 of ~$25 million with cash reserves increasing commensurately, and assuming the share can command a reasonable EV/FCF multiple of 8x (still implying an attractive 12.5% yield) would equate to a share price of ~$46.50 per share. Note assuming a multiple of 10x (or a 10% yield) would equate to a share price of ~$55 per share.

    Conrad Industries
    Potential Share   Price Analysis
    ($ million)
       
    Current Cash 60.2
    -   Special Dividend (11.9)
    - STD (0.3)
     - LTD (1.0)
     +   Q4 2013 Cash Additions 5.0
    + Cash Additions in 2014 25.0
    Net Cash @ 12/2014 77.0
       
       
    2014 FCF Estimate 25
    Assume 8x EV/FCF Multiple  200
       
    +   Net Cash @ 12/2014 77.0
    =   Market Cap. 277.0
    /   Shares Out. (Mil.) 5,961
    Share Price $46.47

    Relative to a private market valuation, there are not a lot of comparisons to look at. The closest comparison is the December 2011 acquisition of Seattle based Todd Shipyards by Portland ship-builder Vigor Industrial LLC. for about $130 million in cash. This equated to a valuation of about 5.3x EBITDA and 9.4x EPS. However, Todd was primarily in the repair business, with limited manufacturing capability, and derived ~95% of its revenue from government contracts. Additionally, Todd appeared to have about half the number of dry-docks and construction bays and does not appear to have made the investments that Conrad has to modernize its facilities and equipment. From a financial standpoint, while the revenue base of Todd at the time of acquisition is about similar in size, Conrad has a higher return, richer FCF business model that Todd. For example, at the time of its acquisition Todd’s EBITDA margin of ~9.5% trails the mid-teens margin of Conrad and Todd’s three year average FCF is about 1/3rd that of the Company. Applying the same EBITDA and EPS multiples to Conrad translates to prices of about $45 and $40 respectively. Noteworthy, these valuation measures were accorded in a depressed market environment, with a subsequent 45% rise in the S&P 500 index since the date of the acquisition. Thus given the combination Conrad’s higher return business model, more modern facilities, more diversified customer base, the improved economy and a higher public market, I believe it is reasonable to accord some premium to these numbers.

    Thus, when triangulating this data, it leads me to an intrinsic value for Conrad of $45-$48 per share, which represents upside potential of 25%-35%.

    Why Are The Shares Mis-Priced?: I believe the shares are mis-priced due to the following: non-SEC filer (due to cost issues, but they release all financials), no conference calls (but management has been very accessible), no sell-side analyst coverage (i.e. they don't need investment banking) and that the Company does not screen well due to temporary growth cap-x cycle in 2012/13 (likely ending in 2013).

    Risks: Another economic downturn, a significant/prolonged drop in WTI oil prices, a sharp rise in steel prices, competitive pricing pressures, loss of a major customer (the top 10 customers comprise ~2/3rds of revenue) and a weather event (i.e. hurricane).

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    SubjectJones Act - MR Product Tanker Building
    Entry12/23/2013 12:39 PM
    Membereal820
    Thanks for the interesting write up.
     
    Do you know if Conrad has explored getting into the Jones Act market for MR Product tankers. Currently really only Aker Philadelphia and NASSCO (General Dynamics) are building these which has led to what many perceive has supply/demand imbalance and rates have spiked (Kinder Morgan Energy Partners announced today a joint M&A deal to acquire vessels from Blackstone and Cerberus so interest in the space clearly there)? It would seem this is a great growth avenue to tap into so curious on barriers to entry (i.e. why a company like CNRD would or would not try and compete)?
     
    Thanks

    SubjectRE: Jones Act - MR Product Tanker Building
    Entry12/24/2013 10:01 AM
    Memberbentley883
    Eal
    Thanks for taking the time to read my write-up and for the question. I am not an expert on the shipping industry, however, it appears that MR tankers would not be a target market for CNRD as the Company specializes on smaller vessels that are used mostly on the inland waters or along the coast. CNRD does not try to compete against the larger shipyards that you mentioned that have scale, larger facilities and other competitive advantages to build these vessels.
    Regards
    Bentley
     

    SubjectFavorable news regarding BP legal settlement
    Entry12/26/2013 12:07 PM
    Memberbentley883

    On Tuesday a U.S. District Judge ruled against BP in its efforts to require greater proof of damages from companies seeking compensation from the 2010 Deepwater Horizon oil spill. This reverses an earlier decision by the U.S. Circuit Court of Appeals, which has slowed down the process and created greater uncertainty regarding if and how much individual business who filed claims would receive in compensation. The following is a link to the news story:

    http://news.yahoo.com/u-court-rejects-bp-bid-require-proof-gulf-165000558--finance.html

    As I pointed out in my recent report on the Company, in December 2012 and February 2013, Conrad submitted claims totaling $22.6 million ($3.79 pre-tax) to the BP Settlement Fund in accordance with the Deepwater Horizon Court Supervised Settlement Program. I have stated that this legal settlement could add meaningful to the Company’s cash position and may result in Conrad issuing shareholders another special dividend. As such, this issue represents a free call option for investors. In my opinion, the recent news increases the possibility that the company will receive a settlement and could speed up the timetable as to when it is realized.


    SubjectRE: Jones Act
    Entry01/02/2014 12:09 PM
    Memberbentley883
    I am not an expert on the vessel construction and shipping business, but let me do my best to respond from the research I have done on the subject. While there has been some off and on discussion of repealing the Jones Act at various times, most observers do not envision a full scale repeal anytime in the near future. This is due to the inertia and complexity of the ~94 year old legislation and the many special interest groups (unions, for example) that it helps support. Many politicians would likely back away from supporting any legislation that could be easily spun as one which costs American their jobs and ships business to foreign manufacturers. This is especially true during the current challenging economic environment, with unemployment relatively high. Some observers believe the best chance of some repeal would be to enact special "carve out" exemptions for some markets like between Hawaii and the west coast, which would not impact the Company's business. Another important thing to consider is that many of the vessels that Conrad manufactures, which by industry standards are classified as small in size, would not likely be a target of foreign manufacturers. Most vessels the Company constructs are designed for use in either the inland waterways or along the coast and are not designed (i.e. non deep hulled) to be used in long ocean-going voyages. Thus, even if these vessels could be built cheaper in places like Asia, transporting them to the US would make this impractical. I suspect, if Jones Act barriers were eliminated, foreign competitors would target the larger Jones Act ships that operate in the open waters between the US mainland and non-contiguous states and territories. Finally, as you probably realize, this issue does not impact the Company's repair business, which accounts for ~30% of revenues.
    Hope this was helpful.
    Bentley 

    SubjectRE: RE: RE: Jones Act
    Entry01/02/2014 02:41 PM
    Memberclancy836
    I've owned a significant block since the mid-teens and continue to like it. Interestingly one other potential tailwind for CNRD is that there actually was a significant non-economic boom in barge construction in the 1980s, caused by legislation (since repealed) enabling barge ownership by individuals to be used as a tax shelter. This led to substantial amounts of unused capacity being built and held by unnatural owners; which subsequently depressed rates for a long time and caused a long-term downturn in new construction as the excess inventory was worked through. Total fleet size declined by 18% as old barges were scrapped without replacement, and many vessels from the glut built during the 1980s are now nearing the end of their 25-30 year useful life.
     
     
     

    SubjectRE: RE: RE: RE: Jones Act
    Entry01/03/2014 02:37 PM
    MemberSupersny
    If we didn't have the Jones Act there wouldn't be any shipbuilding capacity left in the US.
     
    Besides just protecting jobs, the Jones Act is a means of protecting our national security so that the US has the know how and the capacity to build ships if there were another war.
     
     

    SubjectCourt Upholds Favorable Ruling Re: Settlement
    Entry01/12/2014 02:05 PM
    Memberbentley883

    On Friday, a Federal Appeals Court upheld the district judges ruling this past December that blocked BP’s attempt to narrow the scope of the claims filed against it regarding the 2010 Deepwater Horizon oil spill. The following is a link to the news story:

    http://news.yahoo.com/court-upholds-approval-bp-oil-spill-settlement-024213330.html;_ylt=A0oG7trqztBSUDoAhJpXNyoA;_ylu=X3oDMTB0OWllcGhkBHNlYwNzYwRjb2xvA2FjMgR2dGlkA1NNRTM0Nl8x

    As I pointed out in both my original write-up and mu 12/26/13 update, in December 2012 and February 2013, Conrad submitted claims totaling $22.6 million ($3.79 pre-tax) to the BP Settlement Fund in accordance with the Deepwater Horizon Court Supervised Settlement Program. I have stated that this legal settlement could add meaningful to the Company’s cash position and may result in Conrad issuing shareholders another special dividend. As such, this issue represents a free call option for investors. In my opinion, the recent news increases the possibility that the company will receive a settlement and could speed up the timetable as to when it is realized.


    SubjectAnother favorable legal decision
    Entry03/03/2014 09:50 PM
    Memberbentley883
    U.S. court rejects BP appeal over Gulf spill losses:
     
    This news continues to bode well for CNRD receiving a favorable settlement regarding the $22.6 million in claims submitted to the BP Settlement Fund.

    SubjectStrong Q4 results, valuation still attractive
    Entry04/01/2014 07:00 PM
    Memberbentley883

    CNRD reported very strong results for Q4 2013, with revenues, margins and returns exceeding my conservative forecasts. While I have not spoken with management, the following are some quick thoughts in reviewing the financials and the annual report:

    • The very strong 43% y/y and 6% q/q growth in sales reflects the healthy tailwinds the Company is seeing in its primary markets, which I outlined in my report, as well as the cap-ex investments made over the last 18-24 months to increase capacity and build/repair more diverse vessels.
    • One of the most important take-away’s from the annual report was the increasingly more diversified mix of business. Noteworthy, has been the increase in business from oil & gas customers in the Gulf of Mexico, which has steadily increased to 53% of revenues in Q4 from 6% six quarters ago. This reflects the increase in offshore drilling activity and complements the continued healthy commercial business (aided by the inland tank barges and other vessels). The return of oil & gas business adds to confidence that business is sustainable at about current levels in the future.
    • Despite the increase in capacity in 2H 2013, backlog at the end of Q4 was about consistent with Q3 levels and up 27% from last year. Additionally, management indicated that through Q1 to date it had signed an additional $67.3 million in contracts, indicating another healthy quarter of bookings in the quarter.
    • Helping to drive the upside in profitability was the doubling in y/y growth in the Company’s higher margin repairs & conversion business, and what may be a favorable mix and/or pricing environment, leading to margins in this segment at or near record levels.
    • Cash flow was strong on an organic basis, but was a little weighed down by additions to working capital (which are likely temporary fluctuations) and a modest amount of growth cap-ex. Looking forward, managements guidance is for a moderation in growth cap-ex in 2014.
    • From a valuation perspective, adjusting for today’s rise in the stock price the shares are valued on a trailing 12-month basis at: 4.3x EBITDA, 7.0x cash adjusted EPS and at ~ 15% FCF/EV yield. Given the favorable fundamental trends, I believe this valuation is still attractive for a +20% ROIC      business. And don’t forget the possible BP settlement, which recent court rulings seem to bode well for some payment in the near future.

    SubjectRE: Strong Q4 results, valuation still attractive
    Entry04/01/2014 08:06 PM
    MemberLincott
    Wonderful to see how this business has not only grown earnings but also substantially grown their quality (now that one-third of gross profit comes from the repair business and thus is fairly recurring). And these results don't even include Deepwater South, which I assume came online in Q1 as scheduled.
     
    We think the intrinsic value of the company is $80/sh.  

    SubjectRE: Strong Q4 results, valuation still attractive
    Entry04/01/2014 08:10 PM
    Memberotto695
    Are you concerned at all that the bookings and backlog data suggest that Q1 will be flat YoY and down significantly from 4Q13?

    SubjectThoughts on Q1?
    Entry05/15/2014 01:42 PM
    MemberElmSt14
     

    SubjectRE: Thoughts on Q1?
    Entry05/15/2014 02:01 PM
    Memberotto695
    I'm interested too.  i thought it was interesting that for each of the last two quarters they not only announced quarter-end backlog, but also announced backlog or order numbers for the current quarter to-date numbers and they did not follow that pattern with this release.  I would be concerned about a drop in the orders/backlog sequentially (and YoY) for the June quarter, though I have no idea if it will be a short-term issue or more of a leading indicator of a more long-lasting slowdown.
     
    what are your thoughts here?

    SubjectRE: RE: Thoughts on Q1?
    Entry05/15/2014 02:44 PM
    MemberElmSt14

    Otto - in the quarterly filing, they provided this disclosure:


    During the first three months of 2014, we added $59.3 million of backlog to our new construction segment, as compared to $51.4 million added in the first quarter of 2013, which includes double-skinned tank barges, anchor barges, a tug and a towboat. Our backlog was $155.8 million at March 31, 2014, $152.9 million at December 31,2013 and $125.5 million at March 31, 2013. Our backlog revenue at March 31, 2014 was 24.1% more than our backlog at March 31, 2013, and our backlog man-hours were 3.9% more than March 31, 2013. As of March 31, 2014, approximately 15% of backlog revenue related to the repair segment, an increase from prior periods. Since March 31, 2014, as of May 12, 2014, we have added $41.4 million to our backlog. (emphasis added)


    $41.4mm less than half way through the quarter implies a full quarter addition of $90 million to the backlog - which would be substantially higher than what they added over the past 3 quarters and on par with the peak additions of $100 million in 2Q 2013.  Also, a reconciliation of the beginning backlog, additions and revenues shows that there is generally some additional non-backlog revenue which has recently been about ~$20 million per quarter.  Using that as a metric, it appears that either 2Q 2014 revenues or 2Q backlog is going to be up substantially:


     

     

    So I’m not sure I share your concern about a drop in orders or backlog.  Going back over the past few years, it is obvious that the business is lumpy, but there has generally been robust growth in backlog, revenues and EPS.  If the math above on the 2Q backlog is correct, it doesn't appear that we've hit the peak yet:

     


    Lastly, we are talking about a $40 stock with over $11 in cash and a BP claim that could likely be $2.50 per share after tax.  So for $26 per share, you are getting nearly $5 per share in earnings, with a management team that owns over 40% of the stock and distributes $2 special dividends at the end of the year.

     

    Obviously this business is cyclical, but it seems like we are not done yet, judging by what Kirby said on their last call:

    That said, in the absence of acquisitions, we're, what you see us doing is building capacity. And we've talked to you about this before, there's times to build capacity, there's times to do acquisitions, there's times to delever, and then there's times to buyback your stock and clearly we're in the, at that time where we believe it's time to build capacity, and you see us building both inland and coast wise capacity.

    Otto - in the quarterly filing, they provided this disclosure:

    During the first three months of 2014, we added $59.3 million of backlog to our new construction segment, as compared to $51.4 million added in the first quarter of 2013, which includes double-skinned tank barges, anchor barges, a tug and a towboat. Our backlog was $155.8 million at March 31, 2014, $152.9 million at December 31,2013 and $125.5 million at March 31, 2013. Our backlog revenue at March 31, 2014 was 24.1% more than our backlog at March 31, 2013, and our backlog man-hours were 3.9% more than March 31, 2013. As of March 31, 2014, approximately 15% of backlog revenue related to the repair segment, an increase from prior periods. Since March 31, 2014, as of May 12, 2014, we have added $41.4 million to our backlog. (emphasis added)

    $41.4mm less than half way through the quarter implies a full quarter addition of $90 million to the backlog - which would be substantially higher than what they added over the past 3 quarters and on par with the peak additions of $100 million in 2Q 2013.  Also, a reconciliation of the beginning backlog, additions and revenues shows that there is generally some additional non-backlog revenue which has recently been about ~$20 million per quarter.  Using that as a metric, it appears that either 2Q 2014 revenues or 2Q backlog is going to be up substantially:

     

     

    So I’m not sure I share your concern about a drop in orders or backlog.  Going back over the past few years, it is obvious that the business is lumpy, but there has generally been robust growth in backlog, revenues and EPS.  If the math above on the 2Q backlog is correct, it appears that this level of earnings should be sustainable for perhaps a couple of years:

     

     

     

    Lastly, we are talking about a $40 stock with over $11 in cash and a BP claim that could likely be $2.50 per share after tax.  So for $26 per share, you are getting nearly $5 per share in earnings, with a management team that owns over 40% of the stock and distributes $2 special dividends at the end of the year.

     

    Obviously this business is cyclical, but it seems like we are not done yet, judging by what Kirby said on their last call:

    That said, in the absence of acquisitions, we're, what you see us doing is building capacity. And we've talked to you about this before, there's times to build capacity, there's times to do acquisitions, there's times to delever, and then there's times to buyback your stock and clearly we're in the, at that time where we believe it's time to build capacity, and you see us building both inland and coast wise capacity.


    SubjectRE: RE: RE: Thoughts on Q1?
    Entry05/15/2014 02:45 PM
    MemberElmSt14
    One day, I'll figure out how to reply on this thing

    SubjectRE: RE: RE: Thoughts on Q1?
    Entry05/15/2014 02:51 PM
    Memberotto695
    Elmst, strange that they didnt include that in the PR, but it looks pretty good.  the only quibble i would make wth it is that, if they do end up with $90m for the full quarter, it will be below the orders they got in 2Q of last year (i am assuming 2Q is likely the seasonal strong qaurter for orders, thogh maybe it is just lumpy rather than seasonal).  all in all, 90m (should they get that) woud be a very nice num and stock is very, very cheap.

    SubjectRE: RE: RE: RE: Thoughts on Q1?
    Entry05/15/2014 02:59 PM
    MemberElmSt14
    Agreed, $90 million would be less than the $101 million in 2Q 2013, but your overall backlog and revenues would be up ~20% y/y . . . with earnings may be up the same amount.
     

    SubjectRE: RE: RE: RE: RE: Thoughts on Q1?
    Entry05/15/2014 03:01 PM
    Memberotto695
    just to clarify, if they did 90m in orders, but say had roughly 70m in revenues 9and this might be light, just a guess), they would add only 20m net to backlog, so they would still be down YoY (though up sequentially).  so, depending on revenues (and assuming they get 90m), very likely they are still down YoY in qtr-end backlog.

    SubjectRE: RE: RE: RE: RE: RE: Thoughts on Q1?
    Entry05/15/2014 03:22 PM
    MemberElmSt14
    I think you are overlooking the ~$20mm in non-backlog (spot) revenue they have (as shown below).  So with $155mm backlog + $90mm in orders less $50mm in backlog revenues ($70mm less $20mm in revenues not from backlog) = $195mm, which would be up 7% y/y and 25% sequentially.

    SubjectRE: looks good...
    Entry05/22/2014 12:29 PM
    Memberbentley883

    Sorry for the delayed response to your inquiry. Recently I had an opportunity to follow up on the Q1 results and speak with management. My take on the Q1 results are that they reflect more normalized results (following the big repair job that inflated Q4 results), following the 2013 second half step up in capacity, with good cash flow and healthy and more diversified bookings. Management continues to have a generally favorable tone regarding business conditions, noting that bidding activity is “pretty good” and they are seeing a more diversified picture relative to the type of vessels they have in the backlog. They believe this reflects the fact that many of CNRD’s customers are in serious negotiations with their own end-user customers; many tied in one form or another to the ongoing boom in the energy business. This is consistent with comments from other energy related transportation companies like KEX, echoing the favorable secular demand tailwinds in the business. Noting that management has traditionally taken a conservative posture relative to their comments, I view that as a favorable sign that near term bookings will likely remain healthy (albeit possibly lumpy, due to order timing issues).

    Backing their words with actions, I took note of the fact that in the Company’s Q1 filing, the board increased its capital expenditure plans for the year by about 38%, representing a new layer of growth cap-ex in addition to the healthy amount spent over the past 24 months. This action, which I view as a favorable sign regarding the state of demand, will be used to expand CNRD’s Deepwater South facility to construct larger vessels (i.e. 50k-100k coastal tank barges) and enable the Company’s to further diversify its capabilities to meet new customer opportunities.

    These actions, really underscore the transformation the Company has made over the last few years to build its capacity/efficiency and diversify its business relative to its customer base and type of vessels it can construct and repair. While still a cyclical business, in my opinion, this has changed in the volatility/risk in the business and moreover, significantly increased the intrinsic value of the business. Judging from the shares low valuation, selling on a ttm basis at a EV/EBITDA multiple of 3.5x, a cash adjusted P/E of 5.8x and a ~15% FCF/EV yield, I believe this transformation has not been fully recognized by the investment community. As I increasingly find it hard to find high ROIC companies (high teens in the case of CNRD), selling for valuations anywhere close to these levels, I continue to believe it is an attractive long-term holding.

    Another noteworthy point in viewing the Q1 results is the healthy cash flow generated by the business (despite the growth cap-ex investments) in the period, with available cash now at record levels ($11.39 per share) and well above normal operating needs. My discussions suggest that the board, aided by investor comments, has renewed interest in looking at all available options for use of this cash. Noteworthy, in the past the Company has paid special dividends to shareholders when cash was in excess of internal needs. Thus, I believe there is more of a possibility that some action to return a portion of cash to shareholders could occur in the future.

    Hope these comment are helpful.

    Bentley


    SubjectRE: RE: looks good...
    Entry05/22/2014 05:43 PM
    Memberlatticework
    What do you believe is the level of normal internal operating cash required to operate the business -- in other words, how much of the available cash (~$11 per share today) do you consider excess / available for potential return to shareholders through special div / buybacks?
     
    Pro forma for the revised 2014 capex guidance, to what levels do you see this excess cash building in the next few quarters / by year-end 2014?  Curious to know how you've quantified the potential impact of capital return to shareholders and what that number is as % of the current market cap.  Thanks.

    SubjectRE: RE: RE: looks good...
    Entry05/23/2014 11:44 AM
    Memberbentley883

    CMG

    Let me se if I can provide some assistance. As a general rule of thumb, I use 2%-5% of revenues to approximate a company’s working cash needs, using the high end of the range for business like CNRD that may be more capital intensive. Additionally, looking at my quarterly cash flow model, the 5% estimate also correlates with largest swing in working capital need during the last few years. So, I would estimate working cash needed to run the business at about $15-$20 million, well above the net cash of ~$67 million on the books at the end of Q1. Based on the increase in cap-ex, my model shows cash at year end 2014 growing to ~$80 million (assuming a modest use for working capital needs and no benefit from the BP settlement). As you can see, that leaves a healthy amount that could be repatriated back to shareholders. Doing the math, this works out to ~25% of market cap. Management would probably look at maintaining some level above my estimate for a potential acquisition (i.e. a small neighboring shipyard) and due to their conservative nature. Given the insider holdings and float, I do not believe that a share buy-back would not be the board’s first option; special dividends or instituting a small on-going dividend are more likely possibilities.

    PS: In case you were interested, maintenance cap-ex approximates $6 million.

    Hope that is helpful

    Bentley

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