After disposing of an unprofitable division and coming out the winner in a lawsuit, this company is trading at a very undervalued level.
Continental Materials Corporation (CUO)
From S.A. Advisory
Continental Materials Corporation (CUO) recently sold substantially all the assets of Transit Mix Concrete, a leading supplier of building materials in Colorado, for approximately $27 million. The company is retaining its building supply and aggregates businesses in Colorado, which will be rebranded as Castle Rebar and Castle Aggregates. It should be noted that the division sold was not profitable while the remaining division had attractive profits.
The other subsidiaries are in industrial and residential heating and cooling manufacturing, commercial and door distribution and manufacturing.
The remaining divisions have revenues of around $100,000,000.00. According to management, they intend to invest the monies from the settled lawsuit ($15 million and sale of division ($27 million) in US based manufacturing businesses.
In the 9 months ending Sept. 30, 2018, combined revenue was $121 million, but the company lost $3.00/sh. If you look at the number carefully, you will see that $6.7 million lost was a non-cash event and in reality, a line item. If this item had not been realized, the company would have lost only $0.23 before the benefit for income taxes of $1.8 million. The benefit created an income/sh of $0.82.
The company is now entering a new phase. CUO has rid itself of the least profitable division and has a huge cash hoard for one or more acquisitions that will lead this company into the future.
At present there are only 1.7 million shares outstanding and management owns 81%, so this stock is very thin, and the public can own a serious portion of the company with a tiny position. This company has been around since the 50’s.
Of course, this stock is not for everyone. CUO, in our opinion, is a text book example of an extremely discounted value play that is thinly traded and might be considered volatile. We love these obscure stock plays, because when the herd decides to graze in our pastures, fireworks usually prevail.
Let us look at some fundamental variables:
P (price)/B(book), at current prices is.4! Traditionally, any value under 1 is considered a good P/B value, indicating a potentially undervalued stock. Some value investors often consider stocks with a P/B value under 3. If we had a value of 1 our stock would be $45/sh and a P/B at 3X would equal $135/sh.
Let us look at PSR with regards to CUO. We are going to subtract the division sold and only assume the revenue from the remaining divisions, which equal around $100,000,000.00. The current market cap of CUO (share price X shares outstanding 1.7 million) equals $32 million. Our calculated PSR equals .3 and a value of 1 in very undervalued. Our value indicates a severely discounted value. If CUO had a value of 1, then our share price could be $57.00.
If we assigned a 2X cash value/sh and we use the $25.00/sh, then the share price could be $50.00. At present it is hard to formulate a PE ratio, and because of that we give the stock a slight “ding”!
When we look at retained earnings compared to total assets, we again calculate a very strong and enticing statistic. For the 9 months ending Sept. 30, 2018 the total asset equaled $82 million and the retained earnings equaled $62 million. The formula is R/TA, and our calculations equaled 20% which indicates a very, very strong company.
It should be noted that as of March 2018 (page 12 of 2017 10K) management believed that their 4 divisions were worth $41.00/sh. A lot has changed since then, especially during the past month when they were awarded $15 million settlement and the sale of division for $27 million. All of these transactions will show up in the 1st Q of 2019, ending March 30, 2019.
Note: A fair amount of insider buying took place during the month of Dec. 2018.
This is a cheap stock with huge upside potential near term as well as long term. Any way you slice, dice or chop, CUO is a screaming buy at current levels.
William Velmer, S.A. Advisory, www.saadvisory.com, 949-922-9986, February 4, 2019