Tag Archives: MCB

McCoy Re-buy

Very similar to Flint Energy Services (FES.to), I have been buying shares of McCoy Corp. recently (MCB.to). I sold MCB late 2010, so this is my second kick at the can.

You can see from the chart that MCB has done a good job of taking advantage of the increased economic activity. Ebitda margins are near record and ROC is on its way up. The CCC is at an all-time low.

Why is this…

MCB has been deploying it capital intellegently. They recently (June 2011) announced that they would divest Rebel Metal Fabricators. Rebel manufactures and supplies vac and hydrovac systems to customers operating mainly in Western Canada. Earlier (February 2011) they announced another division sale, McCoy Parts and Services.

Apart these operations aren’t extremely meaningful. But together they show how important capital allocation is to management.

MCB had about $0.68/share in cash at quarter end. They recently announced they would issue a quarterly dividend of $0.03/share. Giving MCB a yield of 3.87%. I would expect the dividend to grow quickly going forward.

As you can see, MCB is trading near the valuation low of q4 2008 on an EV/Ebitda basis. Though we are at a larger premium to tangible book and EV/Revenue. You can see that the share price rebounded sharply and the stock appeared expensive on ttm EV/Ebitda basis. Now that those expected earnings have come in (quicker than I had expected), and shares are down 20% or so, the company is cheap enough to warrant purchase.

As long as we aren’t at peak cycle, I think MCB is worth picking up. Given the current economy and outlook, $4.50 doesn’t seem like a far stretch for fair value.   Upper limit fair value could be $6.00, but we’ll talk at $4.50 (if we get there).

Dean

Disclosure: The author is long MCB.to at time of writing.

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McCoy Update

I have held shares in MCB for about a year now, and what a difference a year makes.

MCB has done a good job of participating in the rebound of capital spending in the global energy markets, particularly here in Alberta. I work in the oil+gas service sector, so I felt comfortable with MCB. My plan was to pick a company that was cheap and had the potential to appreciate when money started pouring back into the energy markets. I don’t mean the share prices of Suncor and Encana, I mean when the major firms started spending again. This is where MCB gets their revenue from.

Last year, MCB’s management was very cautious about the future. Oil was around $70-75/barrel (double from its lows), but spending in the oilsands hadn’t picked up materially. I wasn’t until Q3 2010 when the announced  capital spending projects really started to show up for MCB.

More importantly than price is stability. If oil stays at $90, eventually you will see more spending in the oilsands than if oil was to shoot up to $150, then back down to $75. Stability gives management the confidence to go ahead with those massive capital intensive projects. Here is a 3 year price chart of oil.

 

Here is a one year chart of MCB.

 

I wish all of my picks looked like this after a year, but they don’t. With MCB ploughing through the low-end of my fair value range, I need to revisit the position.

The chart shows how illiquid MCB really is. Small trading volumes can really move this company as there seemed to be a large accumulation of shares.

Deciding when to sell cyclicals is tough. If we are in a secular bull market for oil then not only will the earnings of MCB have a significant tailwind, but so will valuations. I don’t know if we really are in a secular bull market, but I know we are a long way from replacing fossil fuels as our primary source of energy. At $1.50 or less, I wasn’t paying for any real growth, just some mean reversion. At $3.50+, you need growth to justify the price. That growth may happen, but I don’t like paying for it.

As I said, I work in the oil+gas services sector. I have an advantage as to when a slowdown hits, though I wouldn’t use that alone. I guess one could equate it to Buffett counting the rail cars in the train yard.

Since having a net cash position, MCB has announced a dividend. Nothing big (1% yield), but it is a start. The dividend is likely to increase substantially from here as the recovery takes hold. This is a positive sign as management seems to recognize that cash in my hands is better than cash on MCB’s balance sheet doing nothing.

There has been no insider buying or selling.

Current Valuation

  • Priced at a conservative EPV
  • 20x TTM earnings
  • 12x smoothed Owner Earnings
  • 11x Peak earnings
  • 2.3x Tangible book
  • Around 10x 2011 estimated EPS

We can speculate as to a fair price for growth but I am not sure how relevant that would be. MCB hit an all time high of $9.00 in 2006. We are a very long way from those earnings though. If the secular argument is true, then $9.00 might seem reasonable, but that was over 5x tangible book value. At 5x tangible book value, you get $9.65 fair value for MCB. I would consider that a very aggressive growth fair value.

Summary and Plan of Action

Management is confident that 2011 earnings will be higher than 2010, how much higher, I don’t know. There has been a huge move in the stock. We value investors always seem to sell too early, and I must get used to that. I was able to get almost 10% of my portfolio in MCB before it started its run. It is now around 15% of my portfolio. I am uncomfortable with that much exposure at current prices. I will par back my position and look for other opportunities. I will keep 5% of my portfolio in MCB unless there are some other screaming buys in the energy sector (that I can understand).

I just wanted to point out that this is post number 20. I have just inserted my first image. Some things I can pick up right away, others I struggle with. I will give myself a gold star for inserting the image (it is a pretty big step for me).

Dean

Disclosure: The author is long MCB.to at time of writing.

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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

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Disclosure: Long MCB at time of writing

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