After selling JRCC and CENF and narrowing down my LKI position I am now 20% in cash, own only 6 stocks - one is a cigar butt and one a special situation - and am in need of a new position.I have Thursday and Friday off of school and am using these two days to research a few stocks hoping to find a fat pitch I will be able to start a position in.
The first stock I have looked at is Drew Industries (DW), which could possibly be a good Small-Cap Value or GARP play.
Company Description
Drew has two reportable operating segments: the recreational vehicle and leisure products segment and the manufactured housing products segment. The RV Segment accounted for 67 percent of consolidated net sales for 2005, and the MH Segment accounted for 33 percent of consolidated net sales for 2005. Approximately 95 percent of the RV Segment sales were products for travel trailers and fifth-wheel RV’s. Drew’s wholly-owned subsidiaries, Kinro, Inc. and its subsidiaries (collectively,
"Kinro"), and Lippert Components, Inc. and its subsidiaries (collectively, "Lippert"), each have operations in both the RV Segment and the MH Segment.
Kinro manufactures and markets components primarily for RVs and manufactured homes (“MH”), including windows, doors and screens, and thermo-formed bath products. Lippert manufactures and markets components primarily for RV’s and manufactured homes, including steel chassis, steel chassis parts, slide-out
mechanisms and related power units, electric stabilizer jacks, leveling devices, axles and steps. Lippert also manufactures specialty trailers primarily for hauling equipment, boats, personal watercraft and snowmobiles.
Certain products manufactured by Kinro and Lippert are also used in modular homes and office units.
Moat?
The company believes its market share ranges from 25 - 70% in its various products. It also says its market share in RV window and door products exceeds 70% and it exceeds 60% in RV Chassis and Chassis parts.
Even 25% market share is envied by some of the best companies in America, from this limited view it looks like Drew is a small company that has a found a niche to exploit.
Management
Insiders hold 20% of the stock.
Edward Rose is the Chairman of the Board, he has been an officer since 1984. Leigh Abrams is the CEO and has been an officer since 1984.
After listening to the conference call I got the impression that management resists the institutional imperative and is generally annoyed with Wall St. analysts. Though their shortness with the calling analysts could be bad sign I believe it shows they would rather be focused on the business then Wall St.’s opinion.
Valuation
Using the earnings of $39.6 million, 13.5% or 75% of analyst’s estimates of 18% growth during the next 5 years, 7% of about half of that for the next five years, 3% to eternity and an 11% discount rate I get a DCF value of $42.13 per share, the current price is $27.49 this is a margin of safety of about 53%. Using more conservative inputs of 10% then 5% growth the value comes to $34.4 per share, a 25% margin of safety.
According to Quicken Drew needs to grow 8.6% over the next 10 years to justify the current price. Though this isn’t a low number it is lower the analyst expectations.
Drew currently trades for 15x earnings, 16x cash flow and four fifths of sales. Reversion to the mean – industry averages – would provide target prices of $54, $62 and $42 respectively. Drew’s industry includes a lot of different companies, the vast majority do not makes doors and windows for RVs so I do not believe this is a good comparison.
Drew’s P/E is historically high and its P/S and P/CF are lower then usual.
Conclusion
This is a very brief write-up and only an introduction to a possible buying decision. I feel Drew is a good company with exceptional management and is undervalued. I do not know the extent of the under valuation or if Hurricane Katrina has inflated earnings, on the other hand high gas prices may have artificially deflated earnings – because of a lower then usual RV market. I used earnings in my analysis, Drew has CapEx of 33 million, 83% of earnings, which is a very high number and would drastically reduce the DCF value. I will not buy now, but I will continue my research and listen to the company’s next cc, which is scheduled for November 1.
2 comments:
Mike,
You should really overhaul your portfolio. There are many attractive opportunities in the large-cap space that are trading at modest valuations. I believe you should get rid of LKI, ICO, EUPA, etc., and into more higher quality companies that are generating lots of FCF which can reinvested into their business or used to fund share buybacks.
I own quality comapnies, but at this stage in my life I wish to also hold cigar butts which hold the potential for good gains within about 2 years also. I do take more risk with this, but in the long-term Buffett, Greenblatt and others have proved it to work very well.
Here are the thesis's for the three companies you mentioned;
ICO - Undervalued coal company, has fallen from selling pressure and the Sago Incidnet. Has good management in Wilbur Ross and would benefit from a 'commodity decade' and a cyclical up cycle in coal.
EUPA - This is a Going Private Transaction, I own it with no interest ihn its balance sheet or its business it will pay me for its share more then I paid for the shares.
LKI - This is a net/net because of a large volume of diamond inventory it is trading for less then its current assets minues its total liabilities.
Post a Comment