CVT.to is an easy idea for me to get comfortable with. I believe we have a company with some short term headwinds (one could argue mid-term) that is trading at a discount to its sum of the parts.
I apologize in advance, this post contains way too many charts.
Let’s take a look at a price chart as well as some valuations.
Not a pretty chart. But we are only looking at the numerator. Let’s take a look at some valuations.
So the company is cheap on P/TB and EV/Ebit to its own history. But is that really cheap? Current P/TB is about 1.5x and EV/Ebitda is at 4.67x. Not liquidation cheap, but not pricey.
Let’s break down the two different divisions:
From their website:
“CVTech-IBC inc. manufactures CVT systems serving major manufacturers of recreational and utility vehicles as well as minicars. In addition, CVTech-IBC inc. operates a branch in France in order to serve the aftermarket parts segment and to maintain a proper customer service for the European market.
CVTech R&D inc. is responsible for the design of CVT systems for the clients of CVTech-IBC inc. Its main source of income is derived from royalties paid by CVTech-IBC inc. on the sales of products developed by CVTech R&D inc. CVTech is the owner of the trademarks and CVTech R&D inc. holds the intellectual property on products which are part of its technological solutions.
CVTech-AAB inc. specializes in the rebuilding of industrial crankshafts, cylinders and engines, the plating of cylinders and the sale of engine-related parts.”
Did you get it? What the heck is a CVT?
CVT stands for continuously variable transmission. Meaning these transmissions have no gears. The author knows a little about the technological advancement in automobiles over the last few years that may help.
I borrowed the chart from another site.
It really doesn’t matter where from, but I wanted to illustrate how little fuel efficiency has improved over the last 20 years. What has really happened is cars have remained the same in efficiency, but have done so with much less harm to the environment. It’s also worth noting that cars (on average) require less maintenance than before. Scheduled tune-ups are now being pushed beyond 150,000 kms (100,000 miles), where they used to be every year or 6 months. It has only been recently that cars have become quite a bit more efficient.
There are all sorts of tricks that manufacturers are using. Variable valve timing, multi-cylinder displacement and yes CVTs. By having an infinite ratio of gears to choose from, CVT cars can perfectly match engine load to driver demand. If you need to pass a truck on the highway, you have a gear ratio that allows you to accelerate fast. If you are at a steady cruise, you have a ratio that puts very little load on the engine (and burns less gas).
So there are some nice tailwinds right. Well lets look at the CVT part of the company.
For a product in such demand you would think there would be more profitability here. What’s worse is the corporation has ended its relationship with Tata motors. This is not good news, but they are in talks with another Asian manufacturer to equip their product to the company’s small cars. I am putting fair value of the CVT division at tangible book value or around $0.12/share. I feel this is conservative as it gives no value to the over $8 million in R+D spent over the last 5 years or an additional $0.11/share.
Every financial statement press release through SEDAR over the last year has contained language that management is looking at selling the CVT division.
With the acquisition of Riggs Dislter in 2009, the energy segment has become a decent sized player in the maintenance and construction to the utility and heavy industrial markets. From the website:
“Thirau ltée is a general contracting firm specializing in the construction and maintenance of electrical power houses and substations as well as transmission and distribution lines. Thirau ltée has two wholly-owned subsidiaries: J.J.L. Déboisement inc. and Thirau LLC. J.J.L. Déboisement inc. specializes in the vegetation control on rights-of-way for transmission and distribution lines. Thirau LLC mainly carries out the above-listed Thirau ltée activities. Thirau LLC also owns a wholly-owned subsidiary, Riggs Distler & Company, Inc. (“Riggs Distler”), a leading provider of maintenance and construction services to the utility and heavy industrial markets.”
Better performance even though it is a tough business environment at the moment. Revenue has been flat as major customers have curtailed spending. I think this can only go on for so long as consumption of electricity in the United States will likely grow by at least 1%/year due to population growth.
I mentioned the sum of the parts valuation earlier. CVT lists its competitors in the energy segment. There are really 4 that are public that can be used for comparison:
MYRG, MTZ, PWR and PIKE. All are much larger than CVT. The smallest out of the 4 is about 4x the size of CVT’s energy segment.
Let’s look at the competition…
I took goodwill out of the assets as I though it may have muddied the waters a bit. ROA and ebit margins may be something to pay a little more attention to. I used what was available to me, maybe a better measurement would have been things like CCC and ROIC, but this will have to do.
CVT actually stacks up pretty well to the competition. So what is the energy segment worth if it traded like its competitors? I uses a few different metrics to determine fair value.
I am just using MYRG and MTZ for comparison. The other two companies didn’t show the same level of profitability so I excluded them from the calculation.
Taking the average of the above fair values, I get $1.65 or 73% higher than the last trade. This is without the CVT value which would push fair value to 85% above last trade. We are looking at a discount to the competition that is not based on growth. This is what I like about this trade, I don’t have to be right on the economy in order to make money. Though it would help.
In order to protect myself from looking only at sum of the parts as fair value, I took the company’s previous valuation history and averaged it out. Then I 33% MOS to arrive at a trigger price. Here’s how my trigger price shakes out…
The risk with the CVT division is that they don’t find another customer in Asia (or anywhere). The division will start bleeding cash. Though this could happen, I don’t see this as a major risk unless the company is willing to let the division struggle. With only $0.12/share of value in the CVT division, the bigger risk is if they don’t sell it and it bleeds cash. Once the CVT division is out of the financials, the energy division can be easily compared and priced to its competitors.
The energy segment may face some short term pain as customers are still reluctant to spend. The Canadian dollar swings can muddy the true earnings power of this division as well. I could also be comparing CVT to other companies that are in far better shape.
Management gets paid higher than I would like. Of course my boss probably says the same about me. I think inaction over the next 2 years is a risk. The CEO owns about 10% of the company and a board member owns 14%. I think their fate is tied to mine somewhat.
Disclosure: The author is long CVT.to at time of writing.