Description

With the VIC Bargain Meter at 13 out of 100, one has to kiss a lot of frogs before discovering a princess. With that in mind, I looked in the micro cap area to find General Bearing Corporation (GNRL). GNRL is admittedly very small ($75mm LTM sales) and does not have great trading liquidity (about 8K shares a day, on average), but it sure looks cheap to me.

GNRL manufactures and assembles “anti-friction” components, also known as ball bearings and roller bearings, for use in the OEM and industrial aftermarket, focusing on customers and applications in automobiles, railroad car and locomotives, trucks, trailers, machinery, office equipment and appliances.

Strategy
The Company’s business strategy is to be a low cost producer of high quality products to customers located primarily in North America. GNRL accomplishes this by virtue of its joint ventures with manufacturers in the People’s Republic of China. GNRL obtained 78% of its bearing and component requirements from various related party Chinese JVs in 2003. In one of these entities GNRL increased its stake to a majority in April 2004, resulting in financial results for this entity, Shanghai General Bearing Co. Ltd (“SBGC”), being consolidated into GNRL’s financials beginning in Q2 2004.

Top Line Trends
Even before considering the additional revenues from this consolidation beginning in Q2 04, GNRL’s revenues increased over 13% in Q1 04 (the last quarter before SGBC was consolidated), and for the nine months ended September 30, 2004, revenues increased nearly 30% including the impact of the consolidation of SBGC, or 18.3% excluding the impact of SBGC. So organic as well as total growth at GNRL is strong.

Financial Information/Capital Structure
As I said earlier, GNRL is small. Last twelve months revenues are $75 million. LTM EBITDA is $7.5 million (up from $7.2 million and $6.5 million in calendar 2003 and 2002, respectively). GNRL has 3.8 million shares outstanding trading at $4.31, for a miniscule equity market cap of $16.3 million. This compares to shareholders’ equity of $24.3 million. Total debt is $23 million and cash is $5.1 million leaving September 30 net debt of $17.9 million.

Despite the small numbers, GNRL generates impressive cash flow. On its $75 million of LTM revenues, GNRL generated $10.4 million of cash from operations. Subtracting $1.8 million for capital expenditures left $8.6 million of cash generated from ops after CapEx. GNRL has $24.6 million of working capital and a current ratio of 2.0 times, so despite a seemingly high debt level relative to its equity market cap or EBITDA, GNRL has plenty of liquidity (plus nearly $12 million of availability under its revolver). In the first nine months of 2004, GNRL paid down over $4 million of debt while strongly increasing cash on the balance sheet.

Valuation
In terms of absolute valuation, GNRL looks cheap. With its stock price at $4.31, GNRL is trading at just 67% of book value and at just 4.6x trailing EBITDA. Adding non cash items (excluding working capital items) back to net income gives LTM cash earnings of over $6 million, or $1.60 per share, for a cash earnings multiple of 2.7x.

On a relative basis the two closest comps are NN Inc. (NNBR) with $293 million of LTM revenues, and Timken (TKR) with $4.3 billion of LTM revenues. Both NNBR and TKR trade at 2.0x book value versus GNRL’s 0.67x book. And EBITDA margins for all three companies are roughly comparable, at 12.0%, 10.1%, and 10.0% for NNBR, TKR, and GNRL, respectively.

At 4.6x trailing EBITDA, GNRL looks dirt cheap compared to NNBR’s and TKR’s 8.2x and 7.4x EBITDA multiples. And with GNRL’s top line and EBITDA growth outlined above, one can’t blame the low multiple on a flat top or cash flow line.

Other Info
As one might expect with a micro cap such as this, directors and officers own a big chunk of the Company: 53%, according to the latest proxy statement. On April 28, the Company announced management’s intention to take the Company private through the making a $3.50 per share cash tender offer. (This was the second attempt by management since 2001). On July 16 management bumped the offer to $4.00 per share. Shareholders, however, were not biting. One shareholder disclosed a 5% position in a 13-D filing dated July 28, 2004 and gave notice of his intention to file dissenter’s rights. This 13-D filer has filed 13-Ds in a number of small cap value situations and deal related stocks pressuring Companies of behalf of investors. In August the buy-out group, failing to get 90% of the shares tendered after nearly four months of trying, let the tender expire by its terms.

The 13-D filer filed an amended 13-D in late August urging the Company to commence paying dividends out of its generous cash flow. On September 16, the 13-D filer disclosed it had raised its position in GNRL to over 6.5%.

The piece of research I saved for last (5 minutes ago) was the piece I should have done first. Incredibly, another VIC member, Clancy836, wrote up GNRL back in May 2004 after the announcement of the $3.50 buyout offer. (No wonder the VIC meter is at 13% - there are few undiscovered gems!). Good call on the part of Clancy836 as the stock is up over 21% since his write-up. Considering the buyout was pulled, I hope VIC readers will find GNRL interesting without a pending deal. But I wouldn't be surprised if management makes another attempt to take GNRL private in the future considering the expense and burden of maintaining a listing (including Sarbanes Oxley) and considering there is no compelling reason for GNRL to remain a publicly traded company.

Catalyst

"Activist" 13-D filer shareholder pushing Company to take steps to maximize shareholder value; Two attempts by management to take Company private since 2001 - third time's a charm? Onerous burden for a $16 million market cap company to remain publicly traded.