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Houston Wire and Cable Company: Not For the Faint Hearted

With earnings closely linked to capital and infrastructure spending in the economy, Houston Wire is a stock meant only for the long term players.

The Houston Wire and Cable Company (HWCC) has been in business for over 40 years, with a history marked with successful IPO’s, and a number of mergers and acquisitions. Operating in an industry heavily linked to capital investment in the economy, HWCC and its peers have recently seen a drop in demand, and resultantly, a decline in sales and earnings. The company, in proportion to its size, seems to be suffering significantly more than its peers.

Houston Wire: Business Overview

HWCC is one of the largest providers of electric and mechanical wire and cable, hardware, and related services, in the USA. The company provides a single source solution to its customers, with an unparalleled variety of products available in stock. While most of its competitors operate within a limited geography or product category, HWCC provides an unmatched depth and breadth of product, with nationwide delivery within 24 hours. This business model, while may provide a USP to the company, can become a burden when times are tough. High levels of inventory, large warehouses, and a widespread distribution network can hurt the balance sheet when sales aren’t going as planned – exactly what is happening with HWCC.

HWCC serves utilities, industrial and infrastructure markets. One-third of the company’s revenues are dependent on activity in the oil and gas sector, where investment has been on a continuous decline for two years now. Similarly, the Capital Projects and Infrastructure (CP&I) spending in the USA has been on a decline since its peak in 2014, and according to PWC, is expected to fall further in 2017 before finally rising again.

Financial Performance

In this scenario, it is not surprising that sales for HWCC have been on a downward trend since FY’15, with annual sales dropping 21% versus the previous year, and sales for 3QFY’16 dropping 17% versus 3QFY’15. HWCC is hurt by the downturn in the economy, more than its peers, with the industry average decline in sales standing at 4% for 3QFY’16. Gross margins for HWCC stand at 18% for the most recent quarter, compared to the industry gross margin of approximately 30%. This difference in cost structure, while may not affect the company’s financials in economic booms, explains why the company is unable to cover its fixed costs when sales are on a decline. While total operating expenses for 3QFY’16 have decreased versus the same period last year, this decrease is not proportionate to the decrease in sales, resulting in a net operating loss of $1.8 million (-3% of sales). As operating expenses consist largely of salaries and other fixed costs, this result is not surprising. Earnings for 3QFY’16 show a loss of $0.09 per share, compared to earnings of $0.04 during the same period last year.

The company’s liquidity position has consistently remained strong, with the current ratio in 3QFY’16 standing at 5.3, more than double the industry average, and in FY’15 at 6.5. The strong current ratio, as well as its decline, can be attributed to inventory levels which are generally high. There has been a 16% drop in inventory during the first nine months of the year, which combined with the reduction in accounts receivable and trade payables (due to reduced sales), has led to the size of the balance sheet reducing by 12% versus FY’15.

HWCC has more long term debt than its peers, but stands stronger where total debt to equity is concerned. The long term debt to asset ratio stands at 20%, in 3QFY’16, down from 25% in FY’15, and is at its lowest levels since 2010. While the company may have more debt than peers, it is in a strong position to meet its financial obligations, with the TIE ratio equal to 14 times (almost three times the industry average). The company’s cash position, while deteriorating versus previous periods, is strong, with a healthy cash flow from operations despite operating losses.

Market Performance

The market, however, doesn’t appear to have positive expectations from HWCC. The company’s stock price has been on a steady decline since the beginning of FY’15, losing more than half its value since then. There is little liquidity in the market with respect to trading volumes, with an average 3-month volume at 41.5 thousand shares. The one-year target price is in the range of $5-6, a drop versus the current price of $7.

If we look at the BV per share, we see this at $5.6 per share, with a P/B ratio of 1.1 (3QFY’16). With the industry trading at a P/B value of 1.8, we see that the market is undervaluing HWCC. The company seems to agree that the stock is undervalued, and has repurchased 91.5 thousand shares between July and September 2016.

The stocks beta against the NASDAQ is 0.15, indicating its strength as a tool for diversification. With returns that have little to no correlation to the market, it provides a buffer when the market behaves against expectations.

Future Outlook

While HWCC has made little capital investment in recent periods, and growth opportunities seem limited, the company recently announced the acquisition of Vertex, a leading master distributor of industrial fasteners, for $32 million. This acquisition ties in with HWCC’s business model and strength in master distribution and indicates management’s positive outlook for the future.  

With CP&I spending expected to increase beginning from 2018, it is obvious that the HWCC stock is not about to provide you with immediate returns. If you are looking to make a quick buck within the next few months, or even a year, this is not the stock for you. However, if you play it out for the long term, sit through the economic downturn, and wait it out 3-5 years, you may just have a winner on your hands.

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Severn Bancorp: Having Weathered The Storm The Bank Is Now Set For Growth

Severn Bancorp (Nasdaq: SVBI), parent company of Severn Bank, is one small cap company to keep your eyes on. Based in Maryland, Severn designs its products and services to meet the needs of the Chesapeake Bay Region (Maryland, Delaware and North Virginia).

One might wonder if the targeted region is large enough to draw the attention of sophisticated investors. The answer would be yes. Severn is a prime example of what many call a “lean and mean” organization. Severn appears to have a bright future that is built upon a storied past.

Severn Bancorp: Weathering the storm

Founded way back in 1946 as a building and loan company, Severn has widened its scope of business to include certificates of deposit, retirement accounts, personal checking accounts and commercial checking accounts. Severn is also a community mortgage lender, providing funds for everything from purchasing to construction, rehabilitation and refinancing, with a special focus on Anne Arundel County.

In 2008, like hundreds of U.S. community banks, Severn was forced to turn to the TARP program to keep their doors open, selling 23,393 original shares of preferred stock to the U.S. Department of the Treasury. The high-interest rate (5% initially then 9% in 2013) took its toll on many banks, forcing them out of business altogether, but Severn endured. In 2009 they also benefited from Dodd-Frank and were released from all agreements with their regulators.

In 2016 the company issued a private placement offering that enabled them to restructure their debt and pay off the remaining TARP balance. Severn sold 2 million shares of common stock at the price of $5.50 for a total of $11 million, lowering the debt costs and paying all accrued and unpaid interest and preferred dividends, propelling the company forward. The bank is now well-capitalized having reduced their cost of funds and improved their financial strength.

In recent years Severn bolstered its management team with two additions that have proven to be solid choices. First, in 2015, they brought in Christopher Chick as Chief Lending Officer. Chick has won many awards in his career, serves on many boards and committees and offers expertise in one of Severn’s most crucial areas – lending. In 2016 the company added Paul Susie as EVP and CFO. Susie has years of experience in both managing and growing companies of similar size and scope. Both men show the company’s commitment to the future.

All of these changes, along with continued management discipline, has led to a steady rise in valuation. Just a few years ago, in 2012, stock was selling at $2.60. Today, the price is hovering around $7.50 and has been steadily rising. The company has seen nine consecutive quarters of profitability.

Management is key

Part of Severn’s long-term stability comes from the leadership of Chairman and President Alan Hyatt, who has been in this role for nearly forty years. Hyatt has built a reputation throughout the region with local small and midsize businesses that rely on Severn’s community style customer service. With Severn, you get the feel of a Nasdaq corporation with the experience of a small bank.

The last few years have seen Severn not only survive, but grow. They are as healthy as they have ever been and gaining further strength daily, as the stock price would indicate. The company is growing at a rate of roughly 10% annually. Year against year pricing shows January 13, 2016 at $5.30 and January 13, 2017 at $7.50. Severn appears to be making the right moves at the right times, all of which is the result of sound financial strategy and tactics.

Only the board knows what the future plans look like. Will they continue to focus on their existing market? Will they expand their territory, products and services? Or, will they seek to be purchased. My guess is the latter. Either way, the stock seems to be healthy with a lot of upside potential.

Interested in more ideas?

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Lindblad Expeditions Holdings Inc.

Hidden Value Stocks: Lindblad Expeditions Holdings Inc.

The simplest way of describing Lindblad is to call it a cruise line operator although there is much more to the company than just cruising.

Lindblad’s offers exclusively natural geographic cruises, which it coordinates with the well-known nature brand. The two entities have signed a multi-year agreement (expires 2025), so Lindblad won’t lose this exclusivity any time soon.

 

The Lindblad difference

Lindblad does not just offer basic cruises. These are highly specialist one-of-a-kind offerings, that Lindblad has the exclusive rights to. As a result, the company has pricing power and economic moat. No other cruise line operator in the world can use the National Geographic brand to sell cruises to some of the world’s most beautiful natural destinations including Antarctica and the Galapagos Islands.

Wealthy retirees and millennials’ desire to spend money on experiences over tangible consumer goods will insure the demand for the company’s services remains robust. Further, the fact that Lindblad offers a one-of-a-kind offering, means the company can charge more than traditional cruise line operators (the company enjoys industry-leading net yields in excess of $1,000 compared to $200 or less for industry leaders such as Carnival, Royal Caribbean and Norwegian. The average trip price is $10,900.).

Even though Lindblad has been operating for decades, the company’s shares have only been publicly traded for around 12 months. During this period there’s not been much action in the shares.

The company came to the public markets via way of a reverse merger into Capitol Acquisition Corp II a SPAC, which was renamed Lindblad on completion of the acquisition. This structure is unusual and has scared off some potential investors, but any doubts should be allayed by the fact that Sen-Olof Lindblad, who founded the company in 1979 and has remained at its head ever since owns around half of the outstanding shares. Concerning ‘skin in the game,’ it’s difficult to be more invested than Mr. Lindblad.

Hidden value stocks

Before 2015, Lindblad expanded adjusted EBITDA by 27% per annum between 2010 and 2014 while revenue grew 15% CAGR. At the time the business was drumming up investor interest to go public, management was promising the doubling of EBITDA between 2015 and 2020.

Lindblad hasn’t stopped growing just yet. The company has two new ships on order for delivery during the next five years. The ships have been self-funded from operating cash flow and cash on the balance sheet. As investments go, these two new boats define how attractive Lindblad is as an investment.

When in service, the ships are expected to generate annual EBITDA of $8 million by the second year on duty for a cost of $40 million. Over the long-term new builds are estimated to have a return on invested capital in excess of 20%, well above Lindblad’s cost of capital no matter which funding route it uses. The first of the two new builds is expected to be delivered during the first quarter of 2017 with the next planned for delivery during the second quarter of 2018.

To help drive long-term growth the company recently acquired travel agency Natural Habitat and has plenty of firepower for additional acquisitions. At the end of the third quarter cash and cash equivalents were $149 million. During the three-month period, the company generated $15.7 million from operations and spent $50.6 million on new ship acquisitions. The purchase of Natural Habitat added $14.6 million in sales to Lindblad’s top-line during the third quarter and boosted adjusted EBITDA by $625,000. The company also has a $35 million stock and warrant repurchase plan in place.

A highly attractive opportunity

Lindblad is a well-run business with a high return on capital, high inside ownership, deep business moat and room for steady growth over the next five years and unfortunately, the market has recognized the company’s attractiveness.

Lindblad’s valuation is not what one would call cheap but considering the company’s growth projections and compared to its peers; the shares might turn out to be a very lucrative long-term investment. For example, at the time of writing shares in Lindblad are trading at a forward P/E ratio of 29.6, compared to Carnival’s 14.9, Norwegian’s 12.2 and Royal Caribbean’s 12.7. Factoring debt into the equation, however, gives a different picture. Lindblad is currently trading at an EV to EBITDA ratio of 11.3 compared to 10.1, 12.4 and 12.2 respectively for the three cruise line operators above.

Lindblad deserves to trade at a much higher multiple. For full-year 2015, the company reported a return on equity of 21.8%; the other three operators all chalked up returns on equity of less than 12% for the year. Further, as noted above during the past five years Lindblad’s revenue and EBITDA has grown at a high double-digit percentage every year. Only Norwegian has produced a performance to rival that although unlike Lindblad, Norwegian has doubled its net asset base over the same period. Lindblad’s earnings have grown while assets have remained constant.

Overall then, Lindblad is a very attractive small-cap extremely worthy of further research.

Interested in more small-cap ideas?

If you’re looking for more ideas like Lindblad, why not subscribe to our quarterly publication Under the Radar Small Caps. Across 25+ pages we detail actionable value investment ideas from qualified investors, with deep dives on at least four under the radar small-caps.

Take a look at and download this no obligation teaser. And if you want to buy the last issue, sign up for a whole year, or just find out more about what’s on offer, click here.
One fund manager in the previous issue returned 85% for his investor last year!
Disclosure: The author may own one or more shares mentioned within this article. For a full list of the author’s holdings click here.

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