McCoy corp

Similar to Flint, but with a little more hair on it, is McCoy corp. MCB has been hit extremely hard by the pullback in the energy sector. Recent earnings show stabilization in revenue and return to profitability in Q1 2010.

The two segments are:

Energy Products and Services is primarily the manufacture of drilling equipment and replacements parts. Revenues peaked at just over 100 million in 2008 and are now at 60 million ttm, though slowly climbing. During the good times EP+S has EBITDA margins north of 10%.

Mobile Solutions designs and builds custom heavy-duty trailers. Revenues peaked way back in 2006 and are now less than half of what they were. This segment seems to lead the EP+S in terms of the economic cycle. The majority of revenue comes from the WCSB, western Canadian sedimentary basin. As with EP+S, EBITDA margins are strong when demand is but have been negative for a few years now.

MCB is even more leveraged to the energy industry than Flint, but that also means more potential upside if and when the industry turns the corner. Management is trying to expand internationally as well acquire more market share in the drilling/work over equipment side of the industry. As well, there is a push into less the cyclical and more specialized side of the energy industry. Last quarter, the decision was made to unify brands to increase brand awareness.

Consolidated

  • Like any cyclical, pretax ROIC is great in the boom years, approaching 20% for several years in a row.
  • Given the nature of McCoy’s business, inventory plays a big part. Whenever I look at inventory, I also look at the entire cash conversion cycle.  Looking at the CCC, the company is taking longer to turn sales into cash on the balance sheet. Around 50 days in 2005 to over 80 days now. Given the nature of the business, I believe the decline in revenue has the biggest impact in the increase in CCC in the last few years. Accounts receivable and inventory have both gone down as a % of current assets and accounts payable has gone up as a % of current liabilities. Though I think this has more to do with sales and the economy, it is still something to watch.
  • Debt has been significantly reduced from 5 years ago.
  • 4 million cash on the balance sheet. Current ratio is over 3, so there should be no liquidity problems in the near future.

Valuation

  • EV/5yr average EBITDA is around 4 times, but that EBITDA is a long way away.
  • Price/TBV is around 1.
  • EPV gives you a value of $3+
  • DCF using owner earnings, or at least my version, gives around 2.50 after normalizing earnings.
  • Trades at less than 3 times peak earnings, though peak earnings seem like an eternity away, they may be possible again.

Risks

  • Long time before the company returns to profitability any where near what was had before the crisis.
  • Last conference call the company said they have some exposure to the big oil spill in the gulf, but it didn’t sound like anything major.
  • I do believe that there is some execution risk from the brand consolidating.
  • Ted Redmond, executive vice president of EP+S recently resigned. Management has said that they are reviewing the EP+S division. According to the AIF, Ted’s salary in 2009 was almost half what is was in 2008. From feast to famine.

Summary

You are buying a company at TBV that is in a sector likely to see growth in the coming years. The valuation is cheap but the risk is higher than Flint. With the potential for very strong mean reversion in margins and revenue, you could easily see the share price surpass $4, though I wouldn’t bank on it happening anytime soon, but 3.00-3.50 is possible in the next 2-4 years. Once earnings recover, I think the dividend will be reinstated, providing a potential catalyst for share price appreciation. Insiders own around 10% directly. Foundation equity owns over 40% of the float, and 3 insiders have over 20% ownership of Foundation equity. I have lived in Edmonton my whole life and am aware of how cyclical the oil sands are. I don’t think you need $150 oil to make money, but stabilization and 75-85 oil will do just fine once confidence returns. Given that more money seems to be involved in commodities than ever, all commodities seems to be more volatile than ever. These extreme swings make the expenditures in the oil sands like a light switch, either off or on, no in between. I think the light switch is just turning on again. MCB under 1.50 is a buy if you can handle it.

Dean

Links

Q1 2010

2009 AR

Investor Presnetation

All other info found at Sedar and Sedi

Disclosure: Long MCB at time of writing

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