Description

Meadow Valley (MVCO) is statistically a very undervalued stock, albeit this undervaluation stems in part due to poor management performance. We have just filed a 13-D on this company. MVCO operates in two business segments: Meadow Valley Contractors and Redi-Mix. The company went public in late 1995 at $6.00 per share. In the following nine years, management came close to driving the company into bankruptcy. Today the business has stabilized, and we believe the remaining values are substantial. There are 3.6 million shares outstanding; total revenues exceed $150 million or over $40 per share. Book value, which we believe is understated, is about $3.35 per share, and the balance sheet is decent with debt about 1/3 of total capital.

Meadow Valley Contractors operates as a heavy construction contractor primarily in the public sector. The company serves as a prime contractor for projects such as bridges, highways, channels and sound barriers. This is a tough market with mostly fixed price contracts. An intimate knowledge of local markets is important, as is intensive management oversight. Redi-Mix manufactures and distributes concrete in Nevada and Arizona. For both of these segments, government spending on infrastructure and private sector construction largely drive demand.

First, what went wrong? Upon going public, the company, flush with cash, decided to enter the pre-stressed concrete business. Four years and about $6 million in pretax losses later the company left the business. The next growth plan was to expand geographically into New Mexico and Utah. Problem contracts in New Mexico and Nevada resulted in disputed claims to MVCO of $30 million ($8 per share) and a single job in Utah will lose almost $5 million on a $10 million contract. As a result of these problems the company’s bonding was sharply curtailed limiting its ability to bid on new business.

Now for the good news. Management did one thing right; it built Redi-Mix into a $50 million business, which has become nicely profitable with excellent prospects. Hopefully, the last major loss contract (Utah) should be completed this year. The company has cut back geographically to two markets, Nevada and Arizona, both growth markets. The company has begun to collect on the disputed claims, receiving $7 million in early 2004. Further recoveries could equal a few dollars per share.

So why do we have a filing position? First, we believe the value of the assets substantially exceed book value. The Redi-Mix business should earn about $2 million net, or $.50+ per share, in 2004. EBITDA for this segment is about $1.25 per share in 2004. Intercompany sales are minor and this business could be split off or sold. We believe this business is worth over $5.00 per share.

The construction business is at best a fair business due to the contract risk. We believe management has finally learnt a lesson and has cut back to its core geographic markets. With revenues in excess of $100 million and with no major problem contracts (a big if), this business can earn at least 2-3% pretax, or $0.50 to $0.80 per share.

Catalyst

We believe the catalyst is an independent board and major shareholders who are not tied to management. The founder’s estate owns about 10% of the stock and has been a seller to diversify. A 12% owner bought the position to pressure the company to sell him the Redi-Mix business. Management directly only owns about 200,000 shares. We believe management is on a short string to create shareholder value.