November 19, 2010 - 12:24pm EST by
2010 2011
Price: 9.70 EPS $1.50 $1.50
Shares Out. (in M): 6 P/E 6.5x 6.5x
Market Cap (in $M): 62 P/FCF 6.0x 6.0x
Net Debt (in $M): -33 EBIT 16 16
TEV ($): 29 TEV/EBIT 1.8x 1.8x

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Summary: This is a follow-up to Bentley883's excellent writeup earlier this year, which I encourage you to revisit as it contains insights and historical data which I will not replicate. Conrad is a Jones Act shipbuilder with four facilities in Louisiana and Texas. Founded in 1948 and family-run, Conrad is conservative, boring, small and illiquid. It is also too cheap to ignore. Despite a 35%+ runup since Bentley's writeup, Conrad still trades almost 20% below tangible book ($12/share). I estimate 2010 earnings of around 1.50/share, putting the stock a bit over 6x eps. $5/share of net cash cushions your downside and pushes the multiple down to a ridiculous 3x eps on an ex-cash basis.

Conrad trades on the pink sheets and stopped filing with the SEC in 2005 to save money, but they release quarterly and audited annual reports ( and their disclosure is quite good. If you need Sarbanes-Oxley compliance and round-the-clock liquidity, buy GM which traded half a billion shares (!!) yesterday.

Developments: Conrad's diversified customer base (oil/gas, government and commercial) has served it well during the recent recession. Although revenues and earnings are below 2007-2009 levels, the company has remained profitable each quarter. Due to a spate of orders backlog more than doubled in the 3rd quarter to 86m, higher even than 2006-2008 levels. That's not to say earnings will soon match 2008's 3.29/share, as management warns recent contracts do not afford the same margins as during the heyday. They also note backlog is not converting to revenue as quickly as before due to customers struggling with project finance in a tight credit environment. Nevertheless, the high backlog bodes well for future revenue stability and continued profitability. With a stock this cheap that's really quite sufficient.

Quarter   Rev  Backlog
2009Q1  49.6  34.1
2009Q2  30.6  40.4
2009Q3  33.7  56.1
2009Q4  30.2  38.3
2010Q1  28.6  48.9
2010Q2  37.1  41.0
2010Q3  33.7  86.1

In other news, Conrad announced a $5m buyback authorization in August. They actually repurchased 38k shares at $7 per share late in the quarter. I do not know if they continued purchases at higher prices during Q4, but a demonstrated willingness and ability to buy at $7 should provide significant downside support for the stock.

Deepwater Moratorium: Conrad has been relatively unaffected by the fallout from the BP's Deepwater Horizon oil spill disaster so far, but warns that the moratorium and continuing political uncertainty have caused some customers to delay projects and/or move assets outside the Gulf. I personally think low domestic natgas prices are a bigger long-term risk to Conrad's oil/NG segment than the moratorium.

Risks: Although Conrad typically bids fixed-price they negotiate steel price pass-thrus into their contracts. This largely insulates them from fluctuating steel prices but they must cover other cost overruns out of pocket. They recently added 0.7m to receivables reserves because of two customer bankruptcies, if this is the start of a trend earnings will suffer. They are exposed to the same legal and environmental risks as any shipbuilder, but a read through their reports does not turn up anything material.
Conclusion: This is a simple valuation play. Conrad's results will fluctuate year-to-year, but I expect it to earn its EV 2-3 times over during the the next decade. If I could say that about other stocks I follow I'd write them up instead of reminding you about this tiny, obscure and illiquid shipbuilder. But I just can't find other stable companies trading this cheaply.


I got nothing.
How about "continued stock repurchases"? Sounds good, even though I don't know if buybacks continued after the 35% runup over the past few months.
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