Friday, August 10, 2012

A catalyst that could make this company fly

While Boeing gets the final credit for assembling the Dreamliner there are many nameless companies that contribute parts, without those parts the Dreamliner would never fly.  Kreisler Manufacturing (KRSL) is one of those nameless companies.  Kreisler describes their product as high quality tubing that can carry oil, water, air, or hydraulic fluid.  Kreisler's balance sheet was originally what had me interested in the investment, but the closer I looked the more the company seemed interesting beyond being a simple asset play.

The company has a patchy history of profitability, moving from a loss early in the last decade to sizable profits and then back to a loss during the financial crisis.  Kreisler took a bit longer than most companies to recover, returning to profitability in the last few months.  The company had always been a cash box with a manufacturing business attached until September 2010 when they announced a large expansion of capabilities in Poland.  The company signed a 10 year purchasing contract with two customers in Poland and committed to build out a $12m facility.  The facility qualified for government development grants totaling $6m, Kreisler paid the rest out of cash.  The Polish subsidiary did $4.5m in sales in the past fiscal year, unfortunately the company doesn't break out any further details.

Here are relevant key stats for the past eight years:



Why is this attractive?

As I researched Kreisler I found multiple aspects of the company and their future that made them attractive.  Unfortunately for me none of them worked together into a grand narrative I could use as a theme for a post.  I want to outline three distinct points that taken as a whole make this a potentially attractive investment.

1. The company is selling at 71% of book value.  The company's balance sheet is fairly clean.  The most significant liabilities are accounts payable.  There is a small bank credit line amounting to $600k, and an environmental liability accrual in the sum of $482k.

The company has $1.9m in cash, and trades at 125% of NCAV.

2. When times have been good they were very good for Kreisler.  The company's past results show they have the know-how and the ability to generate significant profits.  For the 9mo ending March 31st the company has already recorded $1.4m in profits.  

In 2007 and 2008 the company generated over $2m in free cash flow on sales which are similar to what they're doing now.  If Kreisler's cash generation this fiscal year is anything like the past the free cash flow yield at these prices would be close to 20%.  When I see a company with volatile cash flow like Kreisler it makes me wonder if over time they actually generate anything above capital replacement costs.  I totaled free cash flow for the past eight years and the sum is a positive $429,000.  Not a significant amount of money, but at the same time positive, which is more than can be said about many companies.

3. The company announced July 9th that they are selling the Polish subsidiary.  Terms of the deal weren't disclosed, but I would imagine Kreisler will get some of their $6m investment back if not all of it.

I think the sale of the Polish subsidiary has a bigger impact besides the balance sheet improvement.  The company's results appear to have been negatively impacted by the Polish expansion in 2010 and 2011.  It's possible now with the Polish operations handed to someone else that the company can get back to solid profitability.  The Polish sub contributed $4.5m in sales, but my guess is their costs were significantly higher dragging the entire company down.  I believe the sale of the Polish subsidiary is the catalyst needed to unlock value in the company.  If profitability can be restored there is no reason this company should trade below book value.

If the company just merely traded to book value an investor at today's price would realize a 31% gain.  If the company can earn $1/ps or more again there's no reason why this stock couldn't trade near $10 which is almost a 100% gain from the current price.

Why is it cheap, where's the safety?

The company is cheap for what I consider obvious factors.  At a time when the aerospace industry is booming they're failing to turn a profit.  The company expanded in Poland, but the division doesn't appear to be as successful as the company might have imagined.  Without a revenue breakdown it's hard to tell what the Polish results were exactly.  The fact that the company has a growing foreign net operating loss carry forward tells me the Polish division isn't carrying its weight.

I don't believe Kreisler's issues are insurmountable, especially in light of the sale of the foreign subsidiary.  My speculation is that sale will restore their earnings power and provide a nice boost to the balance sheet as well.  

Investing at the current price affords a margin of safety in the price to book value discount.  The item that concerns me is the company's cash flow was negative at the last filing.  My hope is the sale of the Polish sub will restore their cash generation ability.  The problem is that's all speculation, maybe the company wanted to get out of Poland so bad they handed over the keys, we don't know.   

I haven't decided if I want to take a position or not, if I do it would fall under the speculative category, speculative at least until more details are released.


Disclosure: No position

1 comment:

  1. What do you think about their latest earnings announcement now that the Polish sub is gone?

    ReplyDelete