Article published and some links

My CMT article has now been published on Seeking Alpha for those who would like to follow the conversation in the comments section.

While I was researching CMT I was also reading and saving some articles that I thought contained some kind of insight or lesson.  While I am looking for another company to research, I will be sharing these links with you over the next several days.

Why Investing is The World’s Most Difficult Profession is an article by John Standerfer about what makes investing so difficult for most people.

There’s Warren Buffett, and Then There’s the Rest of Us is an article from the Financial Post about Warren Buffett’s amazing track record of picking companies since the 70’s.  Always amazing to how well he has done over these many decades, Incredible

Three (Incredibly Simple) Questions The Most Successful People Use to Change the World is an article from Forbes about how successful people think when a problem arises and how they overcome those problems.

Compound Interest is a Very Powerful Thing is an article from The Value Perspective on the massive and mind numbing effects of compounding over a long time period.  Very useful for us value investors.

Test Your Risk Intelligence-And Become A Smarter Investor is an article from Covestor which has a 5 minute test that will test your risk intelligence, the higher the better.

I will keep the links coming over the next several days and will update you when I find another company to research.  I hope you enjoy the links in the meantime.

Core Molding Technologies Valuation and Analysis

Core Molding Technologies Valuation and Analysis

This is the entire article I have been working on which has been posted this morning to Valuefolio.com for his 50 Stocks in 100 Days Valuation series. I hope you enjoy all the new things I have added to my analysis and the amount of research I have done for this company.  Due to what I found out about Core Molding Technologies while researching, valuing, and analyzing them, CMT has become only the third companies stock I have bought in the past year along with Vivendi and Dole.  Let me know what you think about the article.

This is a guest post by Jason Rivera, founder of Value Investing Journey, a value investing blog. The tone of honesty and humility at his blog is refreshing. His quest for great stocks and as a value investor results in unique, authentic, high-quality content. In this article he values Core Molding Technologies as part of our 50 Stocks in 100 Days series. Follow Jason on twitter @JMRiv1986

For those of you who have not viewed my site and other analysis articles, I hope you enjoy my analysis and valuations, if not let me know where I am going wrong and what I could do better.  For those of you who have visited my site and have seen my valuations, I hope you like some of the tweaks I have made in my analysis.  I am now doing even more thorough research than I have been doing and I have incorporated some new things into my write ups as well, I hope you enjoy.

Core Molding Technologies (CMT) is going to be the subject of this article.  Core Molding Technologies is a manufacturer of fiberglass reinforced plastic products.  They supply products to companies in the medium and heavy trucking, automotive, marine, and other commercial industries.  The plastics are used in automobile hoods, air deflectors, air fairings, splash panels, engine covers, fenders, and bulkheads. They have five production facilities in: Columbus, Ohio; Batavia, Ohio; Gaffney, South Carolina; Warsaw, Kentucky; and Matamoros, Mexico.

Core Molding Technologies has about 90% of its current business coming from the medium and heavy trucking industry.  Sales to Paccar and Navistar make up about 75% of current sales as of the most recent quarter.  CMT has been slowly trying to increase sales to other companies, which I think is a good thing in the long term because if its relationship deteriorates with either of the above two companies CMT could be devastated.  CMT states that its current relationship with both Paccar and Navistar are good and that they work closely with both companies to solve any issue, work on research and development, and pricing.

As of this year’s proxy form, Navistar currently has a seat on CMT’s board of directors as it is owns 9.2% of CMT’s stock, so I do not see Navistar ending its relationship with CMT any time soon.  CMT insiders own around 16% of the company’s stock.  Mario Gabelli personally, and through his funds owns 14.1% of CMT’s stock.  Rutabaga Capital owns 9.5% of its stock.  Rutabaga is a private investment firm whose concentration is in “Undervalued, unloved companies.”

I always like to see high insider ownership, and I am happy that CMT is owned by a couple value oriented investment firms.  I was especially happy to see that Mario Gabelli is a big owner of CMT’s stock, especially since he has bought shares in the company with his own money.  I also really like the ownership by Navistar as that could lead to a potential buy out, or at the very least a continued partnership between the two companies.  I am going to be watching very closely to see if and when any of the above start selling CMT’s stock as that could be a sign that there are big problems ahead for the company.

Here are some quotes from two of CMT’s biggest buyers about the potential huge catalyst in CMT’s main area of operations, the trucking industry:

  • From Paccar, “Over six million heavy duty trucks operate in North America and Europe, and the average age of North American vehicles is estimated to be seven years. The large vehicle parc and aging industry fleet create excellent demand for parts and service and moderate the cyclicality of truck sales.”
  • From Navistar “For our Truck segment, we expect benefits from further improvements in our “traditional” volumes as the industry continues to increase from the historic lows experienced in 2009 and 2010. According to ACT Research, the average age of the truck fleet was 6.7 years at the beginning of 2011, which is the highest average age since 1979. We anticipate higher sales in 2012 for truck replacement as our customers refresh aging fleets. We also expect demand for trucks to increase as freight volumes and rates continue to improve as the economy recovers. In addition to increased demand, we expect to further benefit from improved revenues and margins associated with the exclusive use of our proprietary engines. We expect to realize benefits from plant optimization actions taken during the trough of the truck cycle. Finally, we anticipate positive contributions from business acquisitions and investments made during this period.”

The above is exceptional news and should serve as a catalyst for CMT.

These valuations were done by me, using my estimates, and are not a recommendation to buy any stock, in any of the companies mentioned.  Do your own homework.

All numbers are in millions of US dollars, except per share information, unless otherwise noted.  Valuations were done using 2011 10K and second quarter 2012 10Q.

Asset Reproduction Valuation

Assets: Book Value: Reproduction Value:
Current Assets
Cash & Cash Equivalents 0 0
Accounts Receivable (Net) 26.3 20
Inventories 12.6 6
Deferred Tax Asset 1.8 0
Other Current Assets 2.8 0
Total Current Assets 43.5 26
PP&E Net 51.9 25
Deferred Tax Asset 1.1 0
Goodwill 1.1 0
Total Assets 97.6 51

 

I am using the companies fully diluted share count of 7.4.

  • 51/7.4=$6.89 per share.

EBIT and Net Cash Valuation

Cash and cash equivalents are 0

Short term investments are 0

Total current liabilities are 27

Cash and cash equivalents + short-term investments – total current liabilities=0+0-27=-27

  • -27/7.4=-$3.65 in net cash per share.

CMT has a trailing twelve month unadjusted EBIT of 16.5.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

  • 5X16.5=82.5
  • 8X16.5=132
  • 11X16.5=181.5
  • 14X16.5=231
  • 5X=82.5/7.4=$11.15 per share.
  • 8X=132/7.4=$17.84 per share.
  • 11X=181.5/7.4=$24.53 per share.
  • 14X=231/7.4=$31.22 per share.

Since CMT has had a record trailing twelve months in terms of EBIT, I have decided to normalize EBIT and taken the 10 year average of 8.2 to determine the more normalized intrinsic value of CMT in case it is not able to keep up the pace of the past year.

  • 5X8.2=41
  • 8X8.2=65.6
  • 11X8.2=90.2
  • 14X8.2=114.8
  • 5X=41/7.4=$5.54 per share.
  • 8X=65.6/7.4=$8.86 per share.
  • 11X=90.2/7.4=$12.19 per share.
  • 14X=114.8/7.4=$15.51 per share.

Revenue and EBIT valuation

I am again using trailing twelve month numbers.

Numbers:
Revenue: 168
Multiplied By:
Average 10 year EBIT %: 6.69%
Equals:
Estimated EBIT of: 11.24
Multiplied By:
Assumed Fair Value Multiple of EBIT:                 8X
Equals:
Estimated Fair Enterprise Value of CMT: 89.92
Plus:
Cash, Cash Equivalents, and Short Term Investments: 0
Minus:
Total Debt: 13
Equals:
Estimated Fair Value of Common Equity: 76.92
Divided By:
Number of Shares: 7.4
Equals: $10.39 per share.

 

My low estimate of value using a 5X EBIT multiple was $5.84 per share.  My high estimate of value using an 11X EBIT multiple was $14.95 per share.

Price to Book and Tangible Book Valuation

Numbers:
Book Value: 53.13
Minus:
Intangibles: 2.2
Equals:
Tangible Book Value: 50.93
Multiplied By:
Industry P/B: 2.2
Equals:
Industry Multiple Implied Fair Value: 112.05
Multiplied By:
Assumed Multiple as a Percentage of Industry Multiple: 95%
Equals:
Estimated Fair Value of Common Equity: 106.45
Divided By:
Number of Shares: 7.4
Equals: $14.39 per share

 

My low estimate of value using 75% of industry multiple was $11.36 per share.  My high estimate using 125% of industry multiple was $18.93 per share.

Ratios

Ratios
Current Assets to Current Liabilities: 1.59
Total Debt to Equity: 23.60%
Total Debt to Total Assets: 12.30%
ROIC 10 yr avg From Morningstar: 10.62%
Unadjusted ROIC TTM : 24.60%
Normalized ROIC: 12.23%
Cash Conversion Cycle TTM: 54.47
Unadjusted EV/EBIT: 3.93
Normalized EV/EBIT: 8
ROE 10 yr avg: 15.73%
ROETTM: 21.10%
ROA 10 yr avg: 6.56%
ROA TTM: 11.49%
COGS as a % of revenue 10 yr avg: 83.36%
COGS as a % of revenue 2011: 79.16%

My Interpretation of the Ratios:

  • I do not see any current problems with CMT’s debt levels.
  • CMT’s ROIC is incredible, even if they fall back to the more normalized levels of above 10%.  If CMT can keep up the level of the previous year this company is very undervalued.
  • The cash conversion cycle is a measure of how fast a company can turn its inventories into cash.  In CMT’s case it takes them about 54.5 days to make the conversion.  The number is lower than the high of about 73 in 2009, but not back to pre recession levels which were around 42 on average.  I do not see a major problem here but would like to see the number creep down over time.
  • If CMT can keep its current revenue and profit levels going then they appear to be massively undervalued on an EV/EBIT basis.  If they revert back to the 10 year average EBIT then they appear to be about fairly valued on that basis.
  • ROE and ROA appear to be boosted recently in comparison to the 10 year average in part due to Cost of Goods Sold decreasing as a percentage of revenue.  Hopefully they can keep up that pace as well.

Competitors

The competitors that CMT lists in its annual and quarterly reports are as follows: Sigma Industries, Decoma Composites (an owned subsidiary of Magna International), Molded Fiber Glass Companies, and Continental Structural Plastics.  Here are my thoughts on each competitor after doing research on them.

  • Sigma Industries has operations in various industries including the heavy trucking industry, where CMT gets most of its sales from currently.  Sigma’s operations are mainly in Canada currently so it appears not be too much competition for CMT at this time.
  • Magna International (MGA) is one of the largest and most diversified auto parts suppliers in the world.  I was a bit worried about the competition from Magna towards CMT, but the company currently does not make sales in the medium and heavy trucking segment.  Magna’s main operations are in cars and light trucks at this time.  Magna does state in its 10K that they are always looking for opportunities in various arenas including the heavy trucking industry, Magna’s entry into the heavy trucking industry would be something to watch out for. I think that Magna buying out CMT would be a better option because currently CMT has a market cap of around $50 million and Magna’s is $10.4 billion, meaning it would be a very minimal monetary investment and would also save them time from having to learn the processes by themselves.
  • Molded Fiber Glass Companies is a privately held company whose operations appear to be mostly in the automotive and wind energy arena.  The little Molded Fiber Glass does in the trucking industry does not appear to be in direct competition with CMT as its operations are in entirely different states and regions.
  • Continental Structural Plastics is a privately held company who has operations in automotive, heavy truck, agricultural, HVAC, construction, and material sales.  The following is the best information I could find on Continental “Continental Structural Plastics, Inc. manufactures structural plastic components, bumper beam reinforcements, rocker covers, oil pans, stamped steel seat frames, and underbody shields. It also offers composite seat bases, engine oil sumps, and composite sunshade substrates; and moulders of glass-mat thermoplastic composites, as well as long-glass-fibre-reinforced thermoplastic and direct-LFT composites. The company was founded in 1982 and is based in Troy, Michigan with manufacturing plants in Petoskey, Michigan; and Sarepta, Louisiana.”  Again, CSP does not appear to be a direct competitor in to CMT as they appear to make different products.

After looking into CMT’s competitors it appears that it does not have a direct competitor at this time and that it has found a very profitable niche which also might come with some minor competitive advantages.

Pros

  • Undervalued by almost every one of my estimates of intrinsic value.
  • I have not found any major direct competitors in CMT’s main area of operations.
  • The company has found a niche in its industry that has made them very profitable.
  • The company’s margins have been consistently good to great over the last 10 years: ROIC 10% average over that time period for example.
  • Even if CMT is not able to keep up the pace of the previous year in terms of revenue and margins and reverts back to its 10 year averages, the company has been profitable over that time, even during the recent recession.
  • Navistar, who is CMT’s biggest customer, owns about 9% of the company.  CMT insiders, outside value investment firms including Mario Gabelli personally, and through his funds, own over 30% of the company.
  • By my estimation, the company looks like a potential buy out candidate.
  • The company has been becoming more efficient in its operations in recent years.

Cons

  • The vast majority of CMT’s sales are to only two companies, and they would be devastated if its relationship with either of the two companies deteriorates.
  • CMT is a very small company whose market cap is currently only around $50 million.
  • CMT could be hurt if a bigger, better financed, company enters its industry.
  • On a revenue and margins level, CMT has had a record past year which might not continue into the future.
  • If the past holds true, CMT’s results will be hurt quite a bit by any kind of recession or down turn in the economy.
  • CMT has very low average trading volume of around 15,000, so it could experience wild swings in price.

Potential Catalysts

  • The trucking industry currently has the highest average age of trucks since 1979 which should lead to sustained sales and margin growth.  The high age of the current trucking fleet should at least partially protect CMT’s revenues and margins if there is some new recession, as you can only hold off buying a new truck for so many years and many companies held off buying trucks during the recent recession.
  • In my opinion CMT would be a great buyout candidate for someone like Magna who would be interested in entering the medium and heavy trucking industry as that would be less of a money and time investment for any potential buyer.
  • Navistar who already owns more than 9% of the company also could be a potential buyer.

Conclusion

With all of the above stated I will be using my trailing twelve month unadjusted 5X EBIT estimate of intrinsic value of $11.15 per share.  The reason I am using this estimate of value is that by my estimation CMT should be able to at least partially sustain the previous year’s record revenue and margin numbers.  The 5X EBIT estimate is also conservative enough that it leaves a margin of safety if CMT were to revert back to previous year’s revenue and margins.

I actually think that CMT should be valued at one of my higher estimates of value due to the steadiness of its margins over the past decade and some of the other factors listed above, but I chose this estimate of intrinsic value due to the company’s small size and some of the other risks listed above, just to be safe.

The current share price is $7.35 which gets me a margin of safety of about 35%, reaching my minimum threshold of 30%.

Due to the previous, and for the reasons I listed throughout my article, I have decided to buy into CMT, making it only the third company I have bought this year along with Vivendi and Dole.

If you liked this analysis please visit my value investing blog Value Investing Journey and follow me on Twitter @JMRiv1986.  As always your comments, critique, and criticism are welcome.  Let me know what you think I could do better, where I might have gone wrong, and what you liked about the analysis.

Last minute update as I am getting ready to publish.

Navistar’s CEO of 30+ years has stepped down effective immediately.  This situation is something I am going to watch very closely, but with the information that is currently available I still have decided to buy into CMT at this time.  Hopefully this situation will not affect Navistar’s relationship with CMT.

Request from ValueFolio and Buying Into a New Company

Sorry for the lack of posts in the past few days. While I was researching the new company I just bought into, I got a request from Daniel of ValueFolio.com asking if I would write an article for his 50 Stocks In 100 Days Deliberate Practice series and of course I accepted.

The article will hopefully be published later today and I will share it with you at that time.

I hope you enjoy the analysis and valuation article as I think it is my best thus far.  I have added some new things, done far more research than I have been doing, and I think it has paid off in a much better analysis.

The analysis, and what I found out about the company while researching it, has led me to buy into the company, making it only the third company I have bought in the past year along with Vivendi and Dole.

I cannot wait to share it with you and I hope you enjoy it.

Some Fantastic Links

Before I get back into research and finishing up my checklist I wanted to give you some links that I thought held some kind of insight or knowledge that we all could learn from.

Warren Buffett on his Investment in See’s. See’s is one of his favorite all time investments and I think his reasons for investing should be studied by every investor. Article is from Valuewalk, @Valuewalk on Twitter.

The Secret’s of See’s Candies is an extensive profile of the business, why Buffett bought it, why it is such a good business, its new expansion plans, and how Buffett and Munger almost blew the investment.

Visiting Warren Buffett are notes from someone who visited Berkshire Hathaway on a trip from Columbia Business School in 2006.  These notes are from an interview and speech that was given while on the trip where Buffett gives some very valuable lessons.  The most fascinating thing to me was that Buffett was the following quotes from the article: Emphasis mine.

Question 12: What would you pay for a solid company that is growing earnings at 8-10%/year?

Not many companies will do that. You see a lot of garbage about EBITDA. Depreciation is the worst kind of expense in that it is prepaid. He looks at EBIT/EV. He’ll generally pay 7x for a decent business. For insurance companies, he looks at float and the cost of float.

Looks like that could be a very good starting point for valuations.

Masters of Compounding: Walmart ($WMT) 1968-2012 is an exceptional article from Student of Value on the history of Walmart and what has made it such a fantastic company over time.  I would also recommend following @dgenchev on Twitter if you would like to see his future write ups as they have so far all been fantastic.

How an Average Business Can be a Great Investment by Oddball Stocks has some interesting thoughts about average businesses and their investment potential.  There is some great back and forth in the comments section as well.  I would also recommend reading his two write ups about Hanover Foods that he links to in the article as the analysis he presents is very detailed.

4 Mistakes When Valuing Companies With Large Cash Holdings, and How to Avoid Them is another fantastic write-up by Simple Value Investing.  I would also highly recommend following him on Twitter @SimpleValue as all of his write ups thus far have also been fantastic.  His write ups on Ibersol were very detailed and he laid out a very good investment case for them. Part 1 and Part 2.

I hope you enjoy the links over the next few days as I am now off to finish up my own investment checklist and to research some more companies.

The Investment Checklist, An Epiphany, and My Revised Plans For Deliberate Practice

The Investment Checklist

I would highly recommend that any investor read this book, and I wish that I would have read it sooner.  Not only has it helped flesh out my own checklist, which I will share in the coming days, it will also help me think better, do better research, and hopefully find more companies to invest in.  I have no doubt that reading this book has helped my investment process become much better.

An Epiphany

All of my life I have been a planner, even trying to plan things out years in advance in some cases.  My plan last week that I outlined was a partial testament to that.  While reading The Investment Checklist I had an epiphany and I have also figured out what I thought that I had been missing lately.

I would also like to thank Daniel from ValueFolio in a comment on my posting My Plan for Deliberate Practice  “Great post! I really like your thoughts. Keep up the good work and have fun with it!” Bold is my emphasis.

I had become so structured lately, trying to pump out as many investment write ups as possible, that I forgot to have fun, which is what I have been missing lately.  I also went back and looked at some of previous articles, in particular my Vivendi,  Dole, Chiquita, and Fresh Del Monte write ups.  Not only are Vivendi and Dole the only companies I have bought this year, I also think that those are my best write ups as they are the most thorough, and I spent the most time researching them.

I have always noticed that my plans do not usually work out, even the short term ones, but I have never really thought about why or any way that I could change my thought process until reading chapter 8 in the Investment Checklist.  That chapter is what led to my epiphany that I should become more flexible and not try to plan everything out. I will now be “Steering the boat daily, instead of trying to plot out the course well in advance.”  Now if I find something that I think could help, something I can learn from, or a potential investment idea, I will jump into that instead of trying to finish whatever I was doing, especially if I know that what I am currently doing is not helpful.  In the past I would have finished up doing whatever I was doing just because I started it, and I always finished anything that I started. In my opinion the whole book is fantastic but chapter 8 struck something in me personally, and it helped change my entire outlook on life and investing.

My New Revised Plans For Deliberate Practice

  • Have Fun.
  • Learn Something Every Day.
  • Improve In All Aspects of Life Incrementally Every Day.
  • Become More Flexible.
  • Push Myself Every Day.
  • Become More Confident In My Abilities In All Aspects of Life.

Let me know your thoughts.