A Value Stock to Profit From Trump's Presidency
- By Rupert Hargreaves
Since Donald Trump's election as president of the U.S., shares in infrastructure stocks have surged off the back of speculation that the incoming president will commission a huge new $5 trillion excess debt-funded fiscal stimulus package focused on infrastructure improvement.
The problem is, as with all politicians, it is impossible to know whether Trump will actually follow through with his promised spending plans. And after recent gains, infrastructure stocks now look expensive. If you are looking to pay Trump's infrastructure boom, you will have to pay a premium, although there is also a chance the spending will never emerge, which will leave you high and dry.
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The intrinsic value of GENC
With this being the case, I'm looking to deep value stocks to play the Trump trend. These stocks should have limited downside in the event that the spending never materializes and at the same time, still trade at relatively attractive valuations with the potential for a huge upside if the U.S. suddenly becomes the world's largest construction site.
One company that I have been interested in for some time is Gencor Industries (GENC).
A play on infrastructure
Gencor is a casualty of the lack of spending on infrastructure in the U.S. The company is a manufacturer of heavy machinery used in the production of highway construction materials, synthetic fuels and environmental control equipment. The company sells machinery and related equipment used for the production of asphalt and highway construction materials. Spending cuts on highway and road maintenance have crimped the company's earnings and revenue in recent years. For full-year 2015 the company reported revenue of $39 million, down from $63.2 million reported for 2012. Over the same period net profit fell from $4.5 million to $-1.82 million.
The company is expected to return to profit this year. Third-quarter earnings per share came in at 22 cents, and third-quarter revenue was up 81.6% at $19.9 million. Earnings per share for the nine months ending June 30 came in at 56 cents. Revenue for the first nine months is up around 80%. Assuming the company repeats its third-quarter performance in the fourth quarter, the firm is on track to generate earnings per share of 78 cents for 2016, giving a forward price-earnings (P/E) ratio of 17.3.
A forward P/E ratio of 17.3 may look expensive at first glance, but there are several other things to consider about the company.
First, as far as I can tell there are no Wall Street analysts covering Gencor so there are no predictions what the company might earn this year or next year.
Second, at the end of the third quarter the company reported $10.9 million in cash and cash equivalents and $85.6 million in marketable securities; total shareholders equity at the end of the period was $118.2 million. To put it another way, with 12.1 million shares outstanding (adjusting for the three-for-two stock split enacted earlier this year) Gencor's book value per share is $9.7 of which $8 is cash and cashlike instruments. If you do a very basic calculation by stripping the cash out of Gencor's current market value, the company is trading at a forward cash adjusted P/E of 7.
Per the company's fiscal third quarter 10-Q, of the $85.6 million in cashlike instruments, $7.9 million was invested in equities, $6.7 million was invested in mutual funds, $1 million was invested in exchange-traded funds, $42.5 million was invested in government securities, and the remainder was in cash and money market funds. Net unrealized gains included in the consolidated statements of income for the quarter and nine months ended June 30 on trading securities still held were $700,000 and $2.3 million.
The bottom line
Overall then, as a deep value play on Trump's infrastructure push, Gencor could be one of the best bets. With a robust cash balance the shares have limited downside but a surge in infrastructure spending could see the stock rise to multiples of its current price.
Disclosure: The author does not own any share mentioned within this article.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 4 Warning Signs with GENC. Click here to check it out.
The intrinsic value of GENC
