Gencor Industries: A Cigar Butt Offering A Quick 61% Gain (NYSE:GENC)

Investment Thesis

Buying the shares of Gencor Industries (NYSE:GENC) offers a massive margin of safety because it is trading below its liquidation value of $11.86 per share. In the past ten years, this company has consistently generated an annual net income of $6.5 Million, and the share price of the company has always recovered back above its liquidation value within a one-year time frame. Most importantly, the recent acquisition of Blaw-Knox for $13.8 Million in 2021, the upgrade of listing from NASDAQ to NYSE in 2022, and the change of CEO from John E Elliott to the 55 years old Marc J Elliott in 2022 could be a sign that management is attempting to revive the share price of this company. Our target price is $15.3, and we believe purchasing GENC at $9.5 per share is a profitable trade.

Company Overview

There are many reasons why Gencor Industries is not a typical dying cigar butt company. The company’s primary business is the production of asphalt plants, and recently, asphalt paver machines have been used to make blacktop concretes on roads and highways. GENC is known for its asphalt plants because their Hetherington & Berner asphalt plants line is the oldest in the world, dating back to 1894. Moreover, the asphalt paver machines division operates under the brand name Blaw-Knox. It produces road paving machines. This is the only new division of the company in the past ten years, and we are excited to see management expanding to a new revenue stream. Gencor is one of the few in the industry that remains profitable during the downturn of supply chain interruption and rising commodity costs. As seen in the screenshot from Seeking Alpha below, GENC has the highest gross and profit margin compared to its peer. In 2022, founder E.J. Elliott’s younger son, Marc G. Elliott, took the helm as the company’s CEO.

Catalysts

There are many foreseeable catalysts for GENC to speed up the share price gain to reach our target price. We speculate that the new listing on NYSE and the new CEO Marc J Elliott could mark the beginning of a share price turnaround in this company.

For instance, we suspect that the company could be more transparent by hosting earnings calls which could greatly benefit the share price of GENC. Before COVID, with no supply chain issues and no wars between Russia and Ukraine, Gencor was operating at a much healthier 2019 net income margin of 13%, and its share price was trading above its liquidation value. As stated in 2022 10-Q3, the company’s revenue has grown 20% year to date due to its customers’ anticipation of funding from the five-year, $1.2 trillion infrastructure bill. We expect revenue to grow further once funding begins. Upon the events of supply chain issues easing off, unrest in Europe de-escalate, a further increase in revenue, earnings, and the hosting of the earnings call, we believe the share price of GENC could quickly reach our price target of $15.3, offering a 61% gain.

Financials

The prospects for Gencor Industries are much better than the typical soggy cigar butt. Warren Buffett has moved away from cigar butt investing because most cigar butts are dying business with decreasing revenue and often negative earnings, thereby destroying value over the holding period. Gencor’s financials have proven the opposite. As seen on Seeking Alpha, Gencor’s Revenue has grown from $63 Million in 2012 to $85 Million in 2021. Total net earnings in the past ten years amount to $62.5 Million. This computes to a ten-year average annual Net Earnings of $6.25 Million. As a result, net working capital increased from $105 Million to $153.2 Million, while total Equity grew from $103.5 Million to $166.4 Million. According to the most recent 10Q, its net working capital consists of liquid assets such as $19.5 Million in cash and $91.1 Million in marketable securities. These characteristics make GENC an ideal candidate for cigar butt investing.

Moreover, the nine months ended in 2022 Q3 shows an increase of 23% in Revenue to $80.4 Million due to the five years $1.2 trillion infrastructure bill and the addition of Blaw-Knox. Furthermore, the nine months operating income doubled from $1.4 Million to $3 Million. On the other hand, net income is only negative due to a $4.7 Million loss in marketable securities compared to a $4.9 Million gain last year.

Gencor is benefiting from the government stimulus, but it faces the headwind of rising costs due to inflation. As a result, Gencor Industries is currently operating on a thin net income margin.

Valuations

1) Liquidation Value (Expected Bottom Price of $11.86)

Buying the shares of GENC today is profitable from several perspectives. As seen on 2022 10Q, this company has a total Current Asset of $168.1 Million and a total liability of $14.9 Million. Moreover, the company has a 2021 property tax accrual of $223,000. This computes an assessed property value of about $20 Million at a property tax rate of 1.1%. A quick search of its property in Orlando shows an assessed value of $13.1 Million, and the property in Iowa, which is three times the size of the one in Orlando, is probably worth more. As a result, we believe the estimated value of $20 Million in properties is a conservative measure. With 14.6 Million diluted shares outstanding, this computes to a liquidation value of $173.2 Million or $11.86 on a per share basis. Purchasing GENC for $9.5 offers a 25% gain compared to its liquidation value, and we are happy to find such a bargain.

2) Target Price of $15.3 in One Year (Liquidation Value + Additional P/E of 8)

In the past ten years, the share price of GENC has traded below its liquidation value on a few occasions, and its share price always recovers to above its liquidation value plus an additional P/E of 8 based on ten years average EPS of $0.43.

	2015	2020	2022
52 Week Low	$7	$9.5	$9.5
Current Asset	$112.4 Million	$156.9 Million	$168.1 Million
Total Liability	$7.4 Million	$9.9 Million	$14.9 Million
Estimated Properties Value *	$10 Million	$13.1 Million	$20 Million
Diluted Shares Outstanding	14.3 Million	14.6 Million	14.6 Million
Liquidation Value Per Share	$8.04	$10.97	$11.86
EPS of $0.43 times 8**	$3.44	$3.44	$3.44
Target Price	$11.48	$14.41	$15.3
52 Week High	$15.4	$15.7	Yet to be seen

Click to enlarge

(Source: Author’s Work)

* Estimated Properties Value is computed as reported Net Properties & Equipment divided by reported Net Properties & Equipment in 2022 Q2 times $20 Million of estimated property value today.

** We are using an additional P/E of 8 because this equates to 50% of the median P/E paid in the industry.

As shown in the table above, GENC has always recovered above our target price computation within one year. Therefore, we believe the share price of GENC has a very high chance of hitting our target price of $15.3 within the next 12 months, and this trade is expected to offer a 61% gain.

Risk

We believe purchasing the shares of GENC comes with minimal risks. Gencor Industries is facing labor, supply chain, and freight pressures due to COVID and the ongoing war in Ukraine. Moreover, the company is allocating more workforce to minimize delivery interruptions to its customers. As a result, the company is operating at a thin net income margin of 2% in 2022. However, evident by the company’s ability to be profitable in nine out of the past ten years, we believe any operating loss will only be temporary. Most importantly, purchasing GENC so cheap at a price below its growing liquidation value of $11.86 makes this trade very difficult to lose monies.

Conclusion

It has been proven in the past 100 years that purchasing a consistently profitable company’s stock below its liquidation value during an industry downturn is a foolproof way to make money in the stock market. Many legendary investors such as Benjamin Graham, Warren Buffett, and Joel Greenblatt have done it in the past. Our speculation of a share price turnaround in GENC could speed up the realization of profit in this trade. In addition, the working capital value in this company is poised to increase over time due to its large holding of $91 Million in marketable securities, appreciation of $20 Million of land value, and ability to generate a consistent annual net earnings of $6.5 Million. Our price target of $15.3 in one year makes purchasing GENC at $9.5 an attractive buy.