FSCR- Federal Screw Works

[DTEJD1997]

Hey all:

 

Anybody else invested in/watching Federal Screw Works (FSCR)?

 

I am.

 

I've been watching/aware of this company for about 25 years or so...

 

Contrary to their name, they DO NOT make screws...they make cold formed & machined products primarily for the auto(transportation) industry.  All their factories are in Michigan, along with the HQ.

 

They had quite a good run in the 90's and early 2000's.  Everything came apart in the great recession though.  THEY DID NOT GO BANKRUPT!  Came awfully close though.  Stock price went from something like $45 to $2/share.  They lost a LOT of money...let people go, cut back on products & factories...but they made it through.

 

They used to pay a rather substantial dividend, something close to about $2/share at the peak.  No dividend now, none in the immediate future...but I think if they can continue their good progress, it can be reinstated (probably not anywhere close to $2/share though).

 

These guys are currently making money, and have been making money for almost 3 years running now.

 

The stock is INCREDIBLY thinly traded though...sometimes the bid/ask gets out of whack...

 

They do post the financials on the OTC markets website.  The major quote services still have them losing money, as they are getting out of date information.  That is one of the major factors that gave me an opportunity to accumulate my shares.

 

I've talked with senior management, met them & BOD once...talked for over an hour and they answered most of my questions & concerns.  I think management is competent, takes a LONG term view, and actually cares about the business & quality & legacy & workers.

 

I've put a substantial portion of my net worth in the company and am fortunately sitting on a yuge gain...hopefully to continue!

 

They are making money, good!  They have modern plant & equipment & have invested quite a bit, hopefully to get some more future business.

 

Of course, not everything is perfect...they are heavily dependent on auto manufacturing.  They have an underfunded pension.  Assets in the pension are probably too conservative...a lot of it is invested in bonds & cash and they can't meet their projected returns.

 

They are also on the hook for a "superfund" site cleanup, over $1mm!  It is ironic that GM & Chrysler escaped liability for this as they went through bankruptcy, where FSCR made it through and they've got to pay.

 

Overall, if they can just get a bit more business and smooth out earnings a little bit, I think this could potentially be a multibagger in the near future.  With just slight improvement, they can be earning $6/share or MORE in earnings.  They've done it in the past (even more $$$$)...  Combine that with a dividend of something like $.50/share and you could be looking at a $25 or maybe even $30 stock?

 

Anybody else got any ideas/thoughts on this?

 

 

[Green King]

Approximately 97% of the Company’s net sales in fiscal 2016, 2015 and 2014 were made either directly or indirectly to automotive companies.

 

Looks like the employees owns more of the company than any shareholder with 25 million in pension liabilities.

 

Also looks to be a cyclical marginal business at peak of the cycle. Looks like an interesting tail given the leverage.

 

[Eridon855]

I got in when it was trading at 5.75.My biggest concern is their unfunded pension liabilities and their debt !

 

Also bought Decker Manufacturing at 60.45!

 

[Steven B]

DJ,  like the other posters have pointed out, how do you argue against  the bear case of peak auto vs. pension/debt problems= bad combination? Especially since you have so much of your net worth invested I'm sure you thought this through. How do you answer that?

[DTEJD1997]

DJ,  like the other posters have pointed out, how do you argue against  the bear case of peak auto vs. pension/debt problems= bad combination? Especially since you have so much of your net worth invested I'm sure you thought this through. How do you answer that?

 

Steven:

 

All good questions! 

 

Please keep in mind that I got into my position at prices much lower than today's....

 

A). I very, very, very much doubt that we are at "peak" autos.  This cycle MAY be starting to slow down...and it looks like it is...but that doesn't mean that sales won't take place OR that FSCR (and others) can't make money even if the cycle slows.  As to self driving cars and electric cars and such...that stuff is definitely coming, but I think it is largely a matter of hype at this point, AND will be into the near future.

 

I don't see how there can be self driving cars outside of tightly controlled areas (turnpikes & such).  In Detroit, driving conditions can difficult to outright crazy & dangerous, depending on where you are & time of day/night.  For example, in certain areas, some people will not yield at "yield" signs and don't stop at stop signs or red lights.  You have to be  VERY alert careful driver.  Another example is that on the weekends, in certain places, traffic will move at a "fast" pace.  I've had people honk & flash their lights at me because I refuse to drive faster than 80MPH in a 55 zone....So I am skeptical that self driving cars will influence the market to such a degree that people stop or radically cut back on cars because we are all going to share them.  That might happen in a long time 10+ years out, but I just don't see it in my area, or most of the areas I travel to.

 

As to electric cars, I am sure that more & more of them will be coming...but what will their market share be?  1/10 of 1 percent to maybe 2% of the market?  How long will that take?

 

Days can go by without me seeing a Tesla.  I frequently see Volts for some reason, I think I 2 or 3 out & about today.  Of course, I was next to GM's tech center running errands/eating.

 

So yes, electric cars are coming, but once again, I think it will take years & years for them to take much market share.

 

HOWEVER, the most important thing in the proceeding paragraphs is the word "CARS".  FSCR certainly produces/sells a lot of stuff for CARS, but actually most of their business is in trucks/SUV's.  I think these will take even longer than cars to become electric/self driving/uberized.

 

Then, while vehicle sales in aggregate may be down somewhat, sales of trucks/SUV's are probably going to be more resilient...thus FSCR will have some protection on that front.

 

As to the pension, yes, it most certainly is a problem...HOWEVER, it is not all due at once, and I strongly suspect that it might be overstated somewhat as a liability.

 

Yes, the general debt is also a problem...however, I don't think it is too far out of line.  I know that FSCR is very, very conservative in their management style.  They never would have made it through the great recession if they were not.

 

Assume that a downturn comes in 1/1/18.  I very much doubt it is going to be as strong a downturn as it was in 2007/2008.  If you look at the long term history of FSCR, they have money (even good money) through previous downturns.  I suspect that could be the case again.

 

Further, what happens if a downturn doesn't come until 1/1/19? 

 

FSCR has a tremendous amount of sales leverage.  Another good year or so of earnings, and they will have improved their financial position significantly.

 

I also very, VERY strongly suspect that there are "hidden" assets in their company.  They own all but one of their factories.  I also know for a fact that their physical plant is in EXCELLENT condition.

 

They are also rapidly increasing automation and quality.  They are bidding/working on expanding and getting new business and contracts.  If FSCR can get a couple of $10mm or even $20mm contracts, that would make a tremendous difference for them.  That is almost nothing to the big auto makers, but to FSCR, that would be a huge contract.

 

FSCR has earned quite a bit of money in the past....if they can return to those levels, the stock is trading for a P/E of less than one.

 

I very strongly suspect that current earnings for the next couple few quarters will be better than what is expected and while they might not earn $6/share...they might be trading at a VERY low single digit P/E.

 

A couple more good years and a lot of problems will get solved.

 

If some of the problems get solved, this company is worth MUCH more than $7-8-10 a share...

 

Is it a bit of speculation, perhaps...but if I am right, I am going to make a tremendous amount of money.

 

 

[DTEJD1997]

Hey all:

 

Anybody else watching FSCR?  I am, I am watching it closely...

 

The quarterly & annual report came out the other day.

 

Annual earnings were just OK, they reported operating earnings of $2.22 a share.  HOWEVER, there is a bit of good news in their report.

 

A). Sales in the 4th quarter were on par with the prior year, maybe they are expanding their book of business, or taking just a bit more market share?

 

B). They had a good year for their pension/employee benefits.  Something like $3/share.

 

C). They continue to spend significantly on their capital base.  I very STRONGLY suspect that this is for expansion of the business/new contracts.  I do not think this is simply replacement of existing capital.

 

D). Book value is up substantially, to something like $6.50/share.

 

E). This is their 100th year in business, and now their 5th continuous year of profitability since the great meltdown.

 

All in all, a decent year.  Stock is trading for a P/E of 3.5.

 

 

Any thoughts?

[Williams406]

I'll take a look--sort of want to buy this just for the name.

[debtvulture]

They may be trading at only 3.5x P/E but when taking into account their debt (17.124 mil), postretirement benefits and pensions ($22.091 mil), their EV amounts to $49.825 mil, or roughly 6.0x 6.7x ebitda for the past year (depending on how you want to look at that other income).  Not so cheap, especially considering that it is a VERY capital intensive business.  I feel these type of companies are run for the benefit of their customers and employees, not so much for the shareholders.  That is just my opinion though. 

 

Could they double their Ebitda?  If so then it may be worth holding on to it.  If not, how much higher will a small auto supplier trade?  With the small amount of equity issued it is a VERY levered play. 

[DTEJD1997]

They may be trading at only 3.5x P/E but when taking into account their debt (17.124 mil), postretirement benefits and pensions ($22.091 mil), their EV amounts to $49.825 mil, or roughly 6.0x 6.7x ebitda for the past year (depending on how you want to look at that other income).  Not so cheap, especially considering that it is a VERY capital intensive business.  I feel these type of companies are run for the benefit of their customers and employees, not so much for the shareholders.  That is just my opinion though. 

 

Could they double their Ebitda?  If so then it may be worth holding on to it.  If not, how much higher will a small auto supplier trade?  With the small amount of equity issued it is a VERY levered play.

 

All of what you say has merit.  HOWEVER, while this is a most certainly a levered company, I don't think it is quite as levered as what it first appears.  They own outright (land & buildings) most of their production facilities (360k sq. ft.).  Put a value of $35/sq. ft. on their buildings, and it is significantly more than the market cap of the company.  As crazy as it sounds, real estate in Michigan has gone UP lately!  Only the design center in Brighton is leased.  Their machinery and physical plant is excellently maintained.  I also have a hunch that their pension & retirement obligations, while significant, might not be as bad as it initially appears.

 

In the past, this company was most definitely run for the benefit of shareholders.  They had a VERY long history of paying out dividends.  For example, In 2000, they paid $1.84, 2001 they paid out $1.88/share, 2002 they paid out $1.10.  Dividends of some type were paid until the great meltdown of 2007/2008.  It was almost a miracle that they didn't go bankrupt.

 

They have had sales of over $100MM in the past.  They have had cash flow of over $10MM in the past.

 

They also managed to do this with little or no financial gearing.

 

Of course, the past is the past...but I think it shows that they used to have a tremendous business.  With a bit more hard work & a bit of luck, they might not hit their past glory, but could they come close?

 

I think it is definitely possible.

[DTEJD1997]

Hey all:

 

Are there any other happy holders of Federal Screw here?

 

For a special dividend was just declared in the amount of $.40/share!

 

What a nice way to start the day...

 

I am going to guess that they will have a good fourth quarter and a good year (in terms of sales, earnings, and strengthened balance sheet).

 

Strangely, bid/ask has not moved.

 

I can't wait to see the annual report, which is coming out in a few weeks.

 

Any thoughts?

[brycepeterson]

Thanks for the EV #'s, debtculture.  Does anyone have 2017 FCF #?  And 2018 and 2019 FCF estimates? 

 

DTE - what's your FCF projection for '18 and '19?

 

I made a lot of $ on Magnetek a few years ago.  They make aerial lift systems (cranes, lifts).  They had a huge pension deficit.  To make a lot of $ you need (a) low entry price FCF to EV (b) company uses FCF to aggressively pay-down debt & pension.  At the time, MAG's biz was also growing FCF.

 

Thanks,

 

Bryce

[DTEJD1997]

Thanks for the EV #'s, debtculture.  Does anyone have 2017 FCF #?  And 2018 and 2019 FCF estimates? 

 

DTE - what's your FCF projection for '18 and '19?

 

I made a lot of $ on Magnetek a few years ago.  They make aerial lift systems (cranes, lifts).  They had a huge pension deficit.  To make a lot of $ you need (a) low entry price FCF to EV (b) company uses FCF to aggressively pay-down debt & pension.  At the time, MAG's biz was also growing FCF.

 

Thanks,

 

Bryce

 

Bryce:

 

I have no finalized numbers at this point for 2018...the 4th quarter and annual report should be out in about 3 weeks.  So far, in the 1 9 months of the year, FSCR has only earned $.94/share, which is down somewhat from the prior year.  HOWEVER, the 4th quarter is usually strong.  I could see FSCR earning WELL over $1/share in this year's 4th quarter. 

 

FSCR is almost certainly going to get some MAJOR help on their pension obligation due to the strong performance of the overall market this last year.  That could add another $1.50/share in book value (as pension deficit goes down).

 

I am going to wager that management knows 4th quarter will be very good, that is why the special dividend was declared.

 

Could we see operating earnings of close to $3/share?  Maybe?

 

In the late 90's and early 2000's, FSCR was earning up to $8/share.  I don't think we will go back to those level of earnings...but $4/share if the economy stays strong might not be too far a stretch.

 

Management has been spending a lot of cash flow on equipment.  I am going to wager that a chunk of this is for a potential new truck contract.  If that assumption is correct, AND assuming they now have all (almost all) of the desired machinery in place, they might have tremendous cash flow.

 

I think FSCR is totally flying under the radar and is better managed than it appears at first glance.  Like a lot of my other ideas, many other investors I know simply refuse to even consider such wild & wacky ideas of car parts supplier trading for a P/E of 2.

 

We will see. 

[brycepeterson]

Thanks DTE.

 

I looked at the last 3-4 years cash flow on the OTC markets page.  Looks like FSCR has produced negative FCF in total (one year was +$2 million).  If, given its best FCF year, at $50 million EV, that's only a 4% FCF yield ($2 million FCF / $50 million EV).  I like to invest in companies producing FCF vs. EV, thus would pass at this price.  (I'd need to see consistent FCF or have a strong sense of FCF generation in future years.)  I love the company name, and the idea of paying down debt  & pension can be a big winner. 

 

If the pension plan deficit comes down per 6.30.18 annual report, that might be a good start (what you said).  Still, it hasn't produced FCF regularly, thus I'd want to see that.

[DTEJD1997]

Thanks DTE.

 

I looked at the last 3-4 years cash flow on the OTC markets page.  Looks like FSCR has produced negative FCF in total (one year was +$2 million).  If, given its best FCF year, at $50 million EV, that's only a 4% FCF yield ($2 million FCF / $50 million EV).  I like to invest in companies producing FCF vs. EV, thus would pass at this price.  (I'd need to see consistent FCF or have a strong sense of FCF generation in future years.)  I love the company name, and the idea of paying down debt  & pension can be a big winner. 

 

If the pension plan deficit comes down per 6.30.18 annual report, that might be a good start (what you said).  Still, it hasn't produced FCF regularly, thus I'd want to see that.

 

Bryce:

 

The company name could be their single greatest asset?

 

I've been aware/watching this company off/on for at least 25 years.

 

The past few years are not really a good representation of what the company can do.

 

Yes, the have largely been cash flow negative.  They have too much debt, too many pension obligations, and so on.

 

HOWEVER, there are some factors to consider.

 

A). The company has been in operation for just over 100 years.  They made it through the Great Depression.  They also made it through the GFC (which was arguably worse than the GD for them/industry).  Them making it through the GFC is a testament to the skill and conservative nature of management (who own a big chunk of the company). 

 

When you look at the results they were producing in the 1980's, 1990's and the early 2000's, they were pretty darn good.  They then entered a period in the mid 2000's that has taken them almost a decade to wade through.  They have somewhat downsized the company...they have transitioned partially into higher value added products...they have invested in engineering and automation...they worked with/dealt with the problems of the auto industry.

 

There is a tremendous amount of sales leverage, something like $60+ per share.  Peak margins in the past have been as high as 8%.  That could put peak earnings somewhere around $5-$6/share.  If they can hit that, OR come close for a couple of years, the company will be radically different at the end of those 2 years...debt will be paid down...pensions contributed to....dividends increased/paid...stronger company...better future prospects.

 

B). Ignore all of paragraph A....that is just informed speculation.  Action speaks louder than words.  If FSCR is paying a dividend, I am going to be reasonably sure of three things: 1). They had good/great earnings in 4th quarter, 2). They probably are cash flow positive this year, 3). They are probably going to be cash flow positive in the next year.

 

C). The Ford "F" series trucks are FSCR's single largest model that they produce for.  Even with all of F's problems, the "F" series trucks have been doing very well indeed.  If you look further down the models the produce for, most of them are trucks/SUV's.  Clearly a good place to be in.

 

D). They have had large amounts of capital spending the past few years...I am going to speculate that part of that is in anticipation for new work/models.  I don't know...could it be maybe, just maybe the new Dodge RAM trucks?

 

Well, enough speculation on my part...I think there is potential here.  These guys have certainly done it in the past...they have good relations with the Big 3, they made it through the GFC...they are starting to produce real earnings.  We will know a lot more in 3 weeks.

 

In the end, FSCR will probably always trade for a low PE and discount.  Investors want something with zing & flash (TSLA?).  Who is going to talk about Federal Screw Works at a cocktail party?  Who is going to guy in front of the committee and pound the table that they need to buy Federal Screw Works?

 

Even with all that, I think FSCR should trade for more than LOW single digit P/E's...how about a P/E of 7 or 8?

 

If I am right, I'll be an incredibly happy investor.

[DTEJD1997]

Hey all:

 

Anybody notice that FSCR declared a "special" dividend of $.40/share?

 

What a nice, tasty, juicy dividend!

 

The annual report is coming out in a couple of weeks.

 

It will be interesting to see the results.

 

I am going to guess that they will be good, very good indeed.  I think it is highly likely that the declaration of the dividend is a precursor to good results.  Not 100% sure, but 98% sure.

 

I also think that in addition to a high level of earnings, it is likely that the company will have had some free cash flow for the year.

 

Finally, I think it likely that the pension did well and thus the company has a lower level of obligations.  There is a lot of leverage here, so good results could easily translate into $1/share+

 

Any thoughts?

[DTEJD1997]

hey all:

 

Anybody else see the quarterly & annual report from FSCR?

 

Looks like my prognostication was kinda, sorta, correct....

 

Operating earnings came in at only $2.78/share, lower than what I was expecting.  As of today, the stock is trading for a lofty P/E of 2.8.  Earnings increased by $.56/share over last year.  Sales were actually down a couple of million dollars.

 

Here is where is gets interesting...Pension & post-retirement benefits were reduced by about $4mm, ($3.08/share).  Book value is now about $12.50/share.  Even at $12.50/share, I suspect that is an understated amount.

 

Finally, free cash flow is just above $1/share for the year.

 

Mr. ZurSchmiede hints at possible future sales expansion and a good upcoming year in the commentary.

 

I hope they can keep it up!

 

 

 

[awindenberger]

hey all:

 

Anybody else see the quarterly & annual report from FSCR?

 

Looks like my prognostication was kinda, sorta, correct....

 

Operating earnings came in at only $2.78/share, lower than what I was expecting.  As of today, the stock is trading for a lofty P/E of 2.8.  Earnings increased by $.56/share over last year.  Sales were actually down a couple of million dollars.

 

Here is where is gets interesting...Pension & post-retirement benefits were reduced by about $4mm, ($3.08/share).  Book value is now about $12.50/share.  Even at $12.50/share, I suspect that is an understated amount.

 

Finally, free cash flow is just above $1/share for the year.

 

Mr. ZurSchmiede hints at possible future sales expansion and a good upcoming year in the commentary.

 

I hope they can keep it up!

 

I bought a couple hundred shares today and was happy with the report.

 

My biggest concern regarding taking a larger position is in regards to the pension liabilities. Given the strength of the market the last 9 years and their current portfolio breakdown, I'm concerned that their pension will be going backwards again over the next 5-10 years. If you attend the annual meeting, could you ask them about what they might be doing to lower risk on that front?

 

Thanks for the idea.

[tat2507]

I cant Find the annual Report for FSCR. Where are you getting this Report?

[DTEJD1997]

I cant Find the annual Report for FSCR. Where are you getting this Report?

 

Please try looking here:

 

https://www.otcmarkets.com/stock/FSCR/disclosure

[Spekulatius]

FSCR looks optically cheaper than it is. I get ~$39.2M EV (including pensions) and $7.7M ENITDA or roughly 5x EBITDA. There are quite a few major car supplier trading at similar multiples and those are better business ( Lear, Delphi etc).

Anyone has any idea why they are spending almost 10% of their revenue for Capex, yet revenues revenue not growing? That’s twice as much than their depreciation.

[awindenberger]

Hey DTEJD,

 

FSCR just released their year end report. I'm curious if you plan to go to their annual meeting in about a month? If so, I'm curious as to how they see to shift to EVs affecting their business? Will they/are they making investments which will allow them to continue being a supplier for the auto manufacturers once they start producing EVs in the millions.

 

I probably have a more bullish stance on EV growth than most, as I expect a large majority of new car sales to be EVs by the mid-2020s. FSCR might fell more insulated because they supply mainly truck sales, but I believe trucks will quickly go electric once battery costs come down another 30-40% (in 3-5 years) and consumers will move to them rapidly once they see the benefits (huge torque, large electric charging capability for tools on job-sites, etc).