Description
Schuff Steel (SHFK) is a highly cyclical business coming off the peak and backlog is plunging. It is a nano-cap trading on pink sheet with barely any liquidity. The only positive is that the stock is dirt cheap, so I'll go straight to the numbers.
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share count
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9664
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Price
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$14.0
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|
Debt (assume conversion)
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$7,648
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|
Market Cap
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$135,296
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|
Cash
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$90,881
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|
EV
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$52,063
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Trailing EBIT
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$74,700
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EV/trailing EBIT
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0.7
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P/E Trailing
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2.6
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60% of current market cap is in cash, and by year end, I estimate net cash will approach current market cap, so investors are paying ZERO for a business that generated more net income in last 3 years than current market cap. The company should do normalized revenue of $400M and EBIT of $40M over the cycle, and it should be profitable even at the trough (they lost $1M during the last trough).
Stock has been written twice by scott on VIC, and I refer you to his write-up and thread for background information. In short, Schuff is the largest steel fabricator in the country. Fabrication is the preparation of steel for use at a non-residential construction projects such as casinos, stadiums, hospitals and shopping malls. The biggest drivers for fabrication are the construction cycle and capacity within the industry. Obviously, commercial construction is not the hottest area right now, and Schuff may well be bumping at the bottom for some time. While Schuff is seeing some strength in energy and healthcare projects, they are not enough to offset the big casino projects rolling off the backlog.
My thesis is that the stock is more than discounting the tough fundamentals. SHFK is essentially flat from 3 years ago, yet the company had generated $142M in net income in that period. The upside of a down cycle (if there is such a thing) is that the working capital tied-up in AR is being rapidly converted into cash. Indeed, SHFK finished Q2 with $91M in cash vs. $40M at year end '08 and should finish the year with $120M+ in cash. Since the company barely loses money even during the trough, I don't see much downside from here.
And despite the cyclicality, I think SHFK is a decent business through the cycle, which should be fairly evident in the numbers below. I'd even argue that SHFK is a better company than in the past, since many competitors had exited the business during the last down cycle and SHFK was able to buy assets on the cheap. Several of the companies in the ENR top 10 list of fabricators no longer exist. While I have no data to confirm that industry capacity is not at the same level of excess as in past cycles, strong gross margin (which is actually at all time high in the last Q) should be evidence that pricing pressure is not as fierce.
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2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009E |
| Backlog |
|
$161,304 |
$112,559 |
$113,281 |
$161,897 |
$216,166 |
$380,796 |
$416,600 |
$364,011 |
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| |
|
|
|
|
|
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|
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| Revenue |
$278,095 |
$234,061 |
$230,985 |
$174,245 |
$264,398 |
$396,790 |
$494,272 |
$736,194 |
$681,629 |
$400,000 |
| yoy growth |
|
-16% |
-1% |
-25% |
52% |
50% |
25% |
49% |
-7% |
-30% |
| Rev/Backlog |
|
|
143% |
155% |
233% |
245% |
229% |
193% |
180% |
|
| COGS |
$221,557 |
$189,745 |
$198,524 |
$151,897 |
$221,224 |
$326,651 |
$401,885 |
$582,037 |
$525,050 |
|
| Gross Profit |
$56,538 |
$44,316 |
$32,461 |
$22,348 |
$43,174 |
$70,139 |
$92,387 |
$154,157 |
$156,579 |
$92,000 |
| SG&A |
$32,899 |
$30,533 |
$23,627 |
$23,635 |
$27,046 |
$34,050 |
$42,592 |
$55,843 |
$64,767 |
$48,312 |
| Operating Income |
$23,639 |
$13,783 |
$8,834 |
-$1,287 |
$16,128 |
$36,089 |
$49,795 |
$98,314 |
$91,812 |
$43,688 |
| Interest expense |
($11,711) |
($10,875) |
($10,542) |
($10,111) |
($9,709) |
($9,045) |
($10,217) |
($7,191) |
($5,033) |
($5,033) |
| Income before MI |
$13,033 |
$2,908 |
-$99 |
-$9,567 |
$6,857 |
$27,575 |
$41,306 |
$91,958 |
$87,325 |
$38,655 |
| Income Tax |
($5,506) |
|
$287 |
$3,505 |
($2,136) |
($10,396) |
($15,484) |
($32,084) |
($31,010) |
($13,916) |
| Net Income |
$7,527 |
$2,908 |
$188 |
-$6,062 |
$4,721 |
$17,179 |
$25,822 |
$59,874 |
$56,315 |
$24,739 |
| EPS |
$1.06 |
$0.39 |
$0.03 |
-$0.86 |
$0.67 |
$2.42 |
$3.35 |
$6.21 |
$5.75 |
$2.56 |
| Diluted Shares |
7129 |
7394 |
7119 |
7009 |
7061 |
7095 |
7708 |
9648 |
9799 |
9664 |
| ROE |
18% |
6% |
1% |
-64% |
33% |
56% |
45% |
51% |
33% |
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| |
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|
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|
|
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| Gross Margin |
20.3% |
18.9% |
14.1% |
12.8% |
16.3% |
17.7% |
18.7% |
20.9% |
22.0% |
23.0% |
| SG&A |
11.8% |
13.0% |
10.2% |
13.6% |
10.2% |
8.6% |
8.6% |
7.6% |
9.5% |
12.1% |
| Operating Margin |
8.5% |
5.9% |
3.8% |
-0.7% |
6.1% |
9.1% |
10.1% |
13.4% |
13.5% |
10.9% |
| Net Margin |
2.7% |
1.2% |
0.1% |
-3.5% |
1.8% |
4.3% |
5.2% |
8.1% |
8.3% |
6.2% |
| Incremental GM |
|
|
385.4% |
17.8% |
23.1% |
20.4% |
22.8% |
25.5% |
-4.4% |
22.9% |
| Incremental OM |
|
|
160.9% |
17.8% |
19.3% |
15.1% |
14.1% |
20.1% |
11.9% |
17.1% |
| Tax Rate |
|
|
289.9% |
36.6% |
31.2% |
37.7% |
37.5% |
34.9% |
35.5% |
36.0% |
| |
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| Cash |
$11,100 |
$4,600 |
$10,800 |
$7,600 |
$6,500 |
$13,700 |
$13,713 |
$38,979 |
$39,985 |
$112,881 |
| Receivables |
|
|
|
|
|
$96,059 |
$126,584 |
$158,849 |
$148,848 |
|
| Current Assets |
$95,900 |
$90,300 |
$100,400 |
$85,100 |
$107,000 |
$136,800 |
$170,435 |
$239,327 |
$245,873 |
|
| PP&E |
|
|
|
|
$24,394 |
$22,287 |
$24,447 |
$35,299 |
$55,012 |
|
| Total Assets |
$179,000 |
$171,000 |
$148,300 |
$130,300 |
$146,907 |
$181,000 |
$218,100 |
$297,036 |
$323,228 |
$326,781 |
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| Current Liabilities |
$33,800 |
$26,400 |
$38,100 |
$31,600 |
$45,600 |
$73,900 |
$98,904 |
$129,041 |
$108,801 |
|
| LT Debt, net of current |
$100,200 |
$95,500 |
$91,200 |
$87,000 |
$87,040 |
$85,040 |
$60,667 |
$18,262 |
$18,262 |
|
| Other Liabilities |
|
|
|
|
$45,623 |
$65,089 |
$100,633 |
$161,616 |
|
|
| Total Liabilities |
$136,000 |
$126,000 |
$133,000 |
$120,800 |
$132,663 |
$150,129 |
$161,300 |
$179,878 |
$166,546 |
|
| Equity |
$42,400 |
$45,100 |
$15,400 |
$9,500 |
$14,244 |
$30,871 |
$56,800 |
$117,158 |
$171,670 |
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| |
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|
|
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|
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| Net Income |
$7,527 |
$2,908 |
$188 |
-$6,062 |
$4,721 |
$17,179 |
$25,822 |
$59,874 |
$56,315 |
$24,739 |
| Depreciation |
|
|
|
|
$3,718 |
$3,369 |
$4,099 |
$4,516 |
$5,000 |
$5,000 |
| Change in WC |
|
|
|
|
-$7,161 |
$5,700 |
-$8,618 |
-$13,307 |
-$25,780 |
$39,269 |
| OCF |
|
|
|
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$1,930 |
$26,740 |
$13,912 |
$53,270 |
$34,995 |
$69,008 |
| Capex |
|
|
|
|
-$1,234 |
-$7,851 |
-$4,989 |
-$9,015 |
-$25,207 |
-$10,000 |
| FCF |
|
|
|
|
$696 |
$18,889 |
$8,923 |
$44,255 |
$9,788 |
$59,008 |
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| Working Capital (CA-CL-Cash) |
$51,000 |
$59,300 |
$51,500 |
$45,900 |
$54,900 |
$49,200 |
$57,818 |
$71,307 |
$97,087 |
$57,818 |
| Invested Capital (Debt + Equity - Cash) |
$131,500 |
$136,000 |
$95,800 |
$88,900 |
$94,784 |
$102,211 |
$103,754 |
$96,441 |
$149,947 |
-$112,881 |
| EBIT |
$23,639 |
$13,783 |
$8,834 |
-$1,287 |
$16,128 |
$36,089 |
$49,795 |
$98,314 |
$91,812 |
$43,688 |
| ROA (pre-tax) |
13.2% |
8.1% |
6.0% |
-1.0% |
11.0% |
19.9% |
22.8% |
33.1% |
28.4% |
13.4% |
| ROIC (pre-tax) |
18.0% |
10.1% |
9.2% |
-1.4% |
17.0% |
36.6% |
48.4% |
98.2% |
74.5% |
|
Assuming one wants to pay 5x normalized EBIT of $40M for the business ($36M, $50M, $98M, $92M, $44M from '05 to '09) and $100M excess cash allowing $20M for W/C purposes, SHFK should have an EV of $300M, or equivalent to a $30 stock. With a 20% discount for illiquidity, I get a PT of $24, or 80% upside from here.
Mgmt still owns a majority of the shares, and in the past down cycle, they did try to put in low-ball bid and steal the company from minority shareholders. There were two big hedge fund holders (Plainfield and DE Shaw). Though I can not find SHFK on their 13F's, I suspect they are still holding the shares given the poor liquidity. I would have to imagine they would eventually want to exit the position at a profit, whether it involves relisting or a sale, though last time I talked to the company (2 years ago), CFO appeared object to listing and public company fees. Not much luck reaching the company recently. I guess investors would just need to be patient.
Catalyst
Not much in the NT.