General Bearing GNRL
May 19, 2004 - 9:51pm EST by
clancy836
2004 2005
Price: 3.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 13 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

General Bearing Corporation manufactures and distributes roller and ball bearings for the automotive, railroad, and industrial markets. Reported earnings for the past several years have been impacted by persistent operating losses and asset writedowns at the company’s former European machine tool manufacturing subsidiary, and GNRL stock had declined from 1998 highs of $30 to trade at recent lows near $3. Having unsuccessfully attempted to buy the company at $4.50 several years ago, GNRL management has recently launched an extreme lowball tender offer at $3.50 per share, at the median of this year's $3-$4 trading range and representing a pitifully low multiple to sales, tangible book value, and current core earnings before restructuring charges. The stock has since risen to nearly the $3.50 offering price, and I believe this tender will be unsuccessful without being raised substantially. As GNRL's earnings power over the past two years has been almost entirely concealed by a series of non-recurring writeoffs and restructuring charges, the stock should eventually be worth considerably more as a public company.

The current $3.50 level represents just over half of tangible book value and a price to sales ratio of 0.21. By comparison, publicly-traded competitors Timken (NYSE: TKR) and NN Bearing (NASDAQ: NNBR) are valued at around 2 to 4 times these multiples. GNRL has recently been buying back a significant amount of stock at below book value - over the past three years, the company has repurchased and retired over 410,000 million GNRL shares at a total cost of $1.47 million, with 125,000 of these bought during fiscal 2003. 3.7 million shares remain outstanding.

While GNRL appears fairly priced based on an 17 multiple to trailing earnings, reported income over the past two years has been heavily impacted by operating losses and impairment charges at two unprofitable subsidiaries which have now been disposed of; going forward, GNRL’s actual earnings power appears to be significantly higher. Reported earnings for FY 2003 totaled $1,162,000, or $.30 per share. Before the impact of a non-cash writedown for the closure of a manufacturing joint venture in New York, 2003 net income would have totaled $3.45 million ($0.90 per share), for an adjusted trailing P/E ratio of just 3.88. The company enjoyed positive cash flow from operations of $7.8 million in fiscal 2003, and achieved significant debt reduction, paying down its credit line by $5.8 million. Book value of $22.5 million is entirely tangible, and the company has $2.2 million in deferred tax assets, $1.4 million of which is currently excluded from the balance sheet under a valuation allowance and should be recognized as additional income as the company’s current profitability continues.

Having disposed of its US-based and European operations, GNRL manufactures bearing products through a series of majority-owned joint ventures in mainland China, which the company directly operates and controls. Unlike competitors, GNRL has now been directly managing facilities in China for over 13 years, and appears to able provide extremely low-cost product while maintaining consistent quality control and an ease of new product introduction and engineering adjustments that are unavailable in a pure "outsourcing" strategy. In 1997, the US Department of Commerce granted Shanghai General Bearing a partial revocation protecting it from antidumping rules that ordinarily affect roller bearing imports from China; management believes this revocation provides them with an additional competitive advantage.

The founding Gussack family owns a majority of the common stock, and the current tender is contingent on the participation of a majority of shares not owned by the management-affiliated takeover group. With an end to writedown expenses at former subsidiaries coinciding with a nascent North American economic recovery and ongoing strength in Asian manufacturing, GNRL’s reported earnings over the coming year should materially exceed prior figures, and the significant share buyback will have enhanced the impact of these results. I am anticipating that due to the market price approaching the tender bid (and presumably some degree of fundamental awareness among existing shareholders), management's tender offer will be unsuccessful in attracting a majority of independent shares, and they will have to raise this offer or allow the stock to rise sharply as earnings power is revealed in reported income during the coming year. In the event that the tender is successful, downside will be extremely limited.

Catalyst

Management must either raise their tender price for an immediate buyout, or allow the end of restructuring charges to make core earnings visible, pushing the stock far beyond this lowball bid.
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