Cascade Corp. CAE
December 18, 2007 - 5:09pm EST by
2007 2008
Price: 46.83 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 541 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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  • Manufacturer
  • Earnings Miss
  • High Barriers to Entry, Moat


Tired of sifting through small, leveraged and domestic specialty financial companies?  Not that interested in retailers?  Chinese commodity plays not your forte?  A little worried about this whole sub-prime thing that everyone keeps talking about?  Let me introduce Cascade Corp, symbol: CAE.   They don’t slice and dice mortgages.  It is not a smoldering cigar butt. They don’t sell clothing to a fashion conscious consumer segment.  There isn’t a need for any activist to invest alongside you.  This is a company that actually makes a product.  And they have a whole menu of products that they sell worldwide.  In fact, they are so good at what they do, that they no longer have any real North American competition.   


Cascade is a world-class company being offered by the market at a good price.  Based in Fairview, Oregon (near the Portland airport), Cascade manufactures an extensive range of materials handling load engagement products that are widely used on lift trucks and, to a lesser extent, on construction and agricultural vehicles. 


A little background.  Most forks for the lift truck industry are used in conjunction with wooden pallets.  Wooden pallets present a wide array of problems.  Pallets are typically made of red oak, which has the ability to create terrific warehouse fires.  Additionally pallets create sanitation concerns for the food industry.  For instance they create perfect nesting habitats for mice and rats.  Pallets are difficult to store and are an additional operating expense.  They add weight and cubage to the container, truck body, or rail car.  Most importantly product moved using conventional pallets is often clumsy and results in damaged merchandise. 


Cascade produces two commodity products; regular forks and side shifters.  But their bread and butter is specialty lift truck attachments.  How specialized?  They have one for holding wine barrels, one for beer kegs, one for newspaper rolls, one to help open a boxcar door, and one to carry marble slabs – to name a few. 


Fork lifts and specialty lift truck attachments are very much tied to economic conditions, and as such the market is cyclical.  North American lift truck unit shipments are down 13% in the third quarter compared to the same quarter last year.  Conversely, Europe and China are both experiencing 20% upticks.  Note to self: Start looking at lift truck production numbers for hints on how various economies are fairing.


Cascade is the only company in the world to offer a global material handling solution to their clients.  Cascade has virtually no competition in North America as their market domination has slowly driven off competition over the years.  Europe competition is a different scenario, and currently competition is fierce.  But they plan on tackling Europe with the same strategy they pursued in North America, more on that a little later.  Their factories employ state of the art robotics and their production is highly automated.   Most of their competitors are lift truck manufacturers that do not focus on the fork attachments with the same gusto that Cascade does.  Their focus is on lift attachments that employ hydraulics, and they are good at it.


Currently the stock is near a 52 week low.  The near-90 high price earlier this year, on the other hand, was probably the overwrought handiwork of Reno-based momentum players. They had a recent earnings miss, and their stock always reacts strongly to a consensus miss or consensus beat.  We think the recent earnings miss, coupled with fears of a North American recession (a realistic scenario) has put the stock on sale at a good price.  Their recent initiatives have positioned them well to both produce and sell in China and to export from China into Europe.  They have a goofy reporting calendar, which ends in January 08.  So they are already 3 quarters of the way through 2008.  For “2009” the earnings consensus is somewhere around 4.50 per share. 


So the stock is currently trading at 10 times future consensus earnings.  Not bad.  But the CAGR for Cascade’s revenues is 13.63% for the last five years.  In the same time net income has increased from 4.1 million to 45.4 million.  These were good years for the lift truck industry, to be sure.  How to factor in a North American recession is the crucial variable.  But things might be different now.  Cascade has been positioning itself in Asia and Europe for the last several years.  They are no longer confined to North America.   Regardless, the thesis here is that a recession is baked into the current price and then some.


They generate an excellent return on assets, and have demonstrated excellent growth.  We think at this price they are very attractive from a price to earnings and a price to sales viewpoint.  We think that their unique products offer them a moat of sorts.  They have an extensive database of designs that allow them to quickly and efficiently develop slightly different products customized to their clients needs.  This essentially is a massive barrier to entry for would be competitors.


The other concern (beyond a recession) in the market, and alluded to earlier, is the lack of progress being made in Europe.  2009 will likely not produce any noticeable improvements on this front.  Their strategy in Europe is simple.  Give their clients exactly what they want and do it better than the competition.  This worked well in North America.  For Europe it might be summarized as a “cultural difference” where staff at all levels of Cascade have not gone the extra mile to win business.  Management thinks the problem can be solved and remains undeterred.   Analysts covering this development have grown impatient with their initiatives thus far.  But the good news is that the price already reflects this and at this point offers mostly upside potential. 


Success in Europe is possible. Continued growth in Asia offsetting declines in North America. Fear of upcoming recession subsiding.
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