Although WSCI has experienced modest growth recently, it seems at a lower level than most other midwest metal based contract manufacturers (machine/fabrication.) Furthermore, one should not forget that the nature of this business is cyclical, capital invtensive and has inherently low profits margins.
Steel prices have increased dramatically in the past 3 months which will likely have negative impact on WSCI margins.
Because the company carries over $2 million of goodwill on its balance sheet, tangible book value is below $2 share. Tangible book value and not goodwill based book value is relevent in this industry for valuation purposes. Furthermore, this number has declined in the past few quarters. Also, the recent weak manufacturing economy has dramatically reduced the resale value of metal working equipment so even tangible value needs to be looked at closely.
The last quarter had negative cash flow.
The new building acquisition seems costly at almost$40/sq ft! Too high for a basic industry business. Plus the $1.9 million purchase price will only increase balance sheet leverage and reduce free cash flow. Less expensive ($20-$25/sq.ft) yet fully functional buildings are available with lower R.E. taxes. Facilities don't generate revenues, people and equipment do.
Does it make sense for this company to pay a dividend? Could the money be better used for internal business reinvestment and debt reduction?
To maintain compliance as a public company, WSCI faces excess costs relative to that of a private counterpart thus is at a competitive disadvantage. The situation is too small for efficient and cost effective use of the public markets.
Similiar private companies would likely transact around book value, 50% of sales or a EBIT multiple of 4x.
The logical valuation for WSCI is around $1.75 - $1.90 per share. Furthermore, I would expect increased operating costs to negatively affect profit margins going forward. (upcoming relocation and steel prices).
In my opinion, WSCI would become an interesting investment around $1.40/share with acceptable risk/reward characteristics.
Let's see where WSCI goes..............
While I thought the run up was too much I think the downturn was also overdone. Given the strong balance sheet, excellent dividend, the positive P&L, and yesterday's statement that sales are improving, this stock will continue to rise over the next few months. I expect a 20 to 30 % increase over last night close. This will not touch $2 as touted by others, they are dreaming like those who predicted $10. Get real.
Paul thanks for the excellent and well thought out post. Did I like hearing that you think fair value is just under 2 and around $1.50 is a great investment price? Of course not. Yet, I'd rather hear all the bearish arguments then kid myself thinking that mgmt company can grow earnings (before interest and taxes), sequentially.
On to a couple of your points. Undoubtedly the increase in steel prices and general inflation (like the cost of petrolean products) impacts manufacturers like WSCI. I'm wondering how much an increase in inventories mitigates some of this risk. Also, does WSCI hedge commodity pricing anyway. Doubt it, but would love to hear that have that kind of foresight. Steel prices were so depressed anyway (couldn't last forever and the admin stepped in 2 yrs ago) and all their competitors have to deal with it, I imagine the costs are typically passed to their customers. Unfortunately I realize this lessens the room for additional pricing upticks.
As for the cyclical nature of the business, agreed. Yet, aren't we in an up cycle. And defense, avionics and rec vehicles continue to see increases in spending. Cyclical can be bad in tough times, but very profitable as the cycle turns up. Hence my critical assessment of mgmt. As you said, "Although WSCI has experienced modest growth recently, it seems at a lower level than most other midwest metal based contract manufacturers." This company has yet to really move up yet. Currently undervalued compared to peers. Do you think before the co can really establish some traction, another downturn should be expected?
Tangible book value will continue to get stronger as goodwill continues to come off the balance sheet. Debt had been reduced too, though I am unclear what type of debt this company took-on to finance the new facility. The PR clearly mentions some type of debt instrument. As I said in earlier posts, in this interest rate environment locking in a little debt now is not such a bad thing if they can get a larger return on that investment.
I am a bit astounded WSCI paid that kind of money for a new facility, currently. There must be a significant increase in orders or some leverage being produced to motivate such an expediture. At around $35/sq ft in Minnesota, we are certainly getting more then a building. That is a shocking price actually. Now the CEO did say it is pre-fit for a manufacturing company such as theirs, but does mean it comes equiped with some machinery, all kinds of back-up power and such. I don't know. Are there special security features allowing them to take on more defense work? What is the rationale? I flipped when I was paying $12/sq in NY to build our datacenter (unique facility) and now I can get space for half that. Does the CEO shop at Christies as well or is there some reason for such a high price tag? They can't be that dumb, there has to be something to it.
Here is why I hold out hope, feel free to introduce me to reality though. I hate sheet metal companies and fabricators as investments, for many of the reasons you cite. However, I've been viewing this company as more then that. I've assumed that they are providing niche and specialty products that can hold a little more margin. That they are breaking into markets that have unique contract requirements. That the Taurus support market serves as a unique value-add from other "machine shops". That their manufacturing involves special precision manufacting that many competitors can not provide. Am I overstating the case? (cont-->
As for negative cash flow, I'm not sure that is accurate. I see 55K flowing to the bottom line (even after interest and taxes) according to the last 10Q. That's positive, though barely. What are you looking at? Don't forget they delivered a dividend too. I did try to explain to Timba that the 300K uptick in revs actually cost them slightly over 300K in the Costs of Goods sold category. That certainly is not a margin confidence builder and will make one think it is WSCI's customers with the leverage. The big boys have been able to squeeze supplier margins, which when combined with the increase in the cost of doing business, takes all the profit from new orders. Possibly the new facility will provide new efficiencies and improved productivity. More important though is that they get profitable contracts. I am concerned with WSCI's sales efforts.
Very interested to see how the mkt reacts to last nights PR. It was excellent that the CEO cited multiple segments as gaining momentum. Though again, he did not address any specifics like sales committments, order flow (and an increase in profitability), or new/pending contracts. Hope he is saving it for the earnings call. Of all things this company needs to expand its sales effort and start gaining traction with higher gross margin specialty contracts. That is where we need leadership, or you may be right. $2 wil be fair value.
WSCI needs to be in growth mode. Now is the time. Growth, New Markets and teamwork should be emminating throughout the company, starting right at the top and disseminating right into the Corporate culture to all the ee's. I spoke to some employees/former employees (how's that for DD timba) and am trying to get a bead on the company as it appears to insiders. There is excitement about the move and some trepidation of course (new commute, much further for some, moving date, etc). Unfortunately someone also stated they have not seen GROWTH or innovation come from the mouth of this CEO, ever. Questions of his leadership skills scare the hell out of me. All anecdotal, but I plan to do more digging. Love to hear more opinions.
Oh lastly, as to your question of should this co even be paying a dividend. Well the mkt is discounting it. Great question and a weird one in that it does seem to imply that the company has no good place to spend the money and get a better return. The dividend was quite possibly a strategy to force the mkt to realize the company's truer value. Was it a gimmick or are they planning to keep it for the long run. Mr Market says gimmick, the company gets the last word this earnings call.
So are we to assume that you are not investing in the company and therefore this is the only post we see from you? Or are you one of the type of folks that just has to impart your "wisdom" repeatedly in a string of negative posts until you tire of whatever thrill it gives you?
<<So are we to assume that you are not investing in the company and therefore this is the only post we see from you? Or are you one of the type of folks that just has to impart your "wisdom" repeatedly in a string of negative posts until you tire of whatever thrill it gives you?>>
Why assume, he is not long he basically said so. Timba pardon me but it appears I completely misjudged you. I thought you were interested in learning and that we could have some sharp topical analysis. Really get under the hood and dig. Hell one merely starts with the Financials, the real DD continues to much deeper levels. All you can seem to muster is ad-hominen attack responses towards me. You make choices. You choose instead to ignore the direct responses to the factual argument you introduced as representive of good results. An honest discussion of those numbers and facts will not even be attempted by you. The meat and potatoes are on the table. You seem so busy looking for the butter that you are missing the meal. I'm totally disapointed. It appears you have the aptitude, but not the fortitude.