CUO - Continental Materials

[mjohn707]

Continental Materials is a thinly traded producer of concrete and building products with a history of poor earnings since the financial crisis.  The company has incurred a large write-off of capitalized development costs this fiscal year due to permitting issues with a granite mine.  This is not the first problem they’ve had with their mines or quarries before either, as they’re currently involved in a legal action against the owner of one of their former aggregate leases concerning overpaid royalties.  I believe that lease might have resulted in another big write-off for the company a few years ago.  The management actually seems to be involved in a lot of litigation for a company their size, and their history seems to be mixed with it.  They had a big gain a few years ago for a case that went well, while the other stuff so far seems to have consumed a lot of cash with no results.  They’ve had an acquisition that might have not worked out great before as well, but also a few that seemed to be pretty decent.  Sort of a mixed history here too I suppose.

 

Despite all these issues, I think CUO is a reasonable investment at current prices.  The assets they own produce basic goods that are essential to the economy, and they are one of just a handful of companies that produce those goods for a majority of their segments.  In the concrete business for example, they’re one of only two producers for the Pueblo, CO market, and one of four producers for the Colorado Springs, CO market.  They also have two HVAC businesses that sell niche product lines, and a company that sells commercial doors and keypads regionally.  One of the HVAC businesses is one of four producers in their product category, and one might be something like one of 20 producers, and these two businesses compete nationally.  This is all just from memory, but I think it’s accurate.

 

Even though the company has not been able to earn sustained profits on a consolidated basis in a long time, before the financial crisis it was doing a lot better.  And although the smaller businesses seem to be pretty steady, the company seems to struggle with concrete segment that represents 50% of their sales.  The Pueblo and Colorado City markets they operate in have been in oversupply for a long time, and the situation with this segment probably won’t improve until they see an uptick in local construction activity.  I suspect that the company could sell off the smaller businesses for a significant fraction if not the entirety of the company’s market capitalization however, and I bet they could sell the concrete business for at least book value despite the weak earnings.  In the 10-K they calculate that the gross value of their businesses is something like 75M, and I don’t think that’s a crazy number. 

 

The problem here is that the company is controlled by the Gidwitz family who holds something like 60% of the common stock.  There are also two other long-term holders who own another 20% put together.  It’s hard to speculate on the family’s intentions with the company, but I would suspect that a sale of the company or any of the divisions is not in the cards in the immediate future.  My best guess is that they just plan to operate the businesses as it is currently comprised indefinitely.  It’s hard to identify any type of catalyst that would cause the stock to go up tons from here outside of a big improvement in the company’s operating performance, but I think at 60% of TBV adjusting for the LIFO reserve, and around 40% of the management’s estimate of the market value of all the businesses it’s just too cheap.  There’s likely some value here for investors with a little patience, and you never know what could happen to the upside with a little luck.  On the downside I think it’s unlikely that you’d stand to take a big loss considering the company’s low level of debt and depressed valuation, but who knows.

 

Current Price:  16.50

Market Cap:  28M

P/E:  15

P/TBV:  60% (adjusted for LIFO reserve)

Continental_Materials_2_1_1.xlsx

[fishwithwings]

Thx for the idea.  Why did you adjust the Inventory?  Where did management’s mention the market value of all the businesses?

 

Continental Materials is a thinly traded producer of concrete and building products with a history of poor earnings since the financial crisis.  The company has incurred a large write-off of capitalized development costs this fiscal year due to permitting issues with a granite mine.  This is not the first problem they’ve had with their mines or quarries before either, as they’re currently involved in a legal action against the owner of one of their former aggregate leases concerning overpaid royalties.  I believe that lease might have resulted in another big write-off for the company a few years ago.  The management actually seems to be involved in a lot of litigation for a company their size, and their history seems to be mixed with it.  They had a big gain a few years ago for a case that went well, while the other stuff so far seems to have consumed a lot of cash with no results.  They’ve had an acquisition that might have not worked out great before as well, but also a few that seemed to be pretty decent.  Sort of a mixed history here too I suppose.

 

Despite all these issues, I think CUO is a reasonable investment at current prices.  The assets they own produce basic goods that are essential to the economy, and they are one of just a handful of companies that produce those goods for a majority of their segments.  In the concrete business for example, they’re one of only two producers for the Pueblo, CO market, and one of four producers for the Colorado Springs, CO market.  They also have two HVAC businesses that sell niche product lines, and a company that sells commercial doors and keypads regionally.  One of the HVAC businesses is one of four producers in their product category, and one might be something like one of 20 producers, and these two businesses compete nationally.  This is all just from memory, but I think it’s accurate.

 

Even though the company has not been able to earn sustained profits on a consolidated basis in a long time, before the financial crisis it was doing a lot better.  And although the smaller businesses seem to be pretty steady, the company seems to struggle with concrete segment that represents 50% of their sales.  The Pueblo and Colorado City markets they operate in have been in oversupply for a long time, and the situation with this segment probably won’t improve until they see an uptick in local construction activity.  I suspect that the company could sell off the smaller businesses for a significant fraction if not the entirety of the company’s market capitalization however, and I bet they could sell the concrete business for at least book value despite the weak earnings.  In the 10-K they calculate that the gross value of their businesses is something like 75M, and I don’t think that’s a crazy number. 

 

The problem here is that the company is controlled by the Gidwitz family who holds something like 60% of the common stock.  There are also two other long-term holders who own another 20% put together.  It’s hard to speculate on the family’s intentions with the company, but I would suspect that a sale of the company or any of the divisions is not in the cards in the immediate future.  My best guess is that they just plan to operate the businesses as it is currently comprised indefinitely.  It’s hard to identify any type of catalyst that would cause the stock to go up tons from here outside of a big improvement in the company’s operating performance, but I think at 60% of TBV adjusting for the LIFO reserve, and around 40% of the management’s estimate of the market value of all the businesses it’s just too cheap.  There’s likely some value here for investors with a little patience, and you never know what could happen to the upside with a little luck.  On the downside I think it’s unlikely that you’d stand to take a big loss considering the company’s low level of debt and depressed valuation, but who knows.

 

Current Price:  16.50

Market Cap:  28M

P/E:  15

P/TBV:  60% (adjusted for LIFO reserve)

[mjohn707]

The mention the valuation in the goodwill impairment calculation in the 10-K.  I've never seen it laid out quite like they have it there before.  As far as the inventory, they keep it on the LIFO standard for tax purposes, and the rule says that if you use it for taxes you have to use it for GAAP too, so it can make sense sometimes to add the reserve back to the book value adjusted for taxes and all, and that's what I'm doing here