Description

I posted the Schuff idea June 2005 so please refer to that for background. In that write up I talk about the business and margins along with links to financial information. At that point it was a very cheap stock but had entrenched management and was on the pink sheets so you had to like the ridiculously compelling valuation.

The good news is that the stock trades at a cheaper valuation now at 3.5x op income. While still on the pinks, the idea has a much clearer catalyst as DE Shaw and Plainfields Asset Management now have board seats and majority control and with their more hedge fund-like short to medium term investing horizons the valuation discrepancy should get corrected.  In addition, as the price has increased so has liquidity (albeit off a tiny base) and market cap. My prediction is that DE Shaw probably wants to sell the company or relist the company onto a real exchange (they provide Q like quarterlies as it stands) and get a market comp valuation.

All my numbers reflect full conversion of the $30mm convertible note (convertible at $11)

Share count = 9.5mm

Price =15

Debt (assuming conversion) = $40mm

Cash = $11mm

EV = $171mm

Trailing Operating Income =48.3mm

My estimate of NTM Op Inc (based on backlog) = 50mm

EV/Trailing Operating Income = 3.55x

EV/3q ann op inc = 3.17x

Trailing P/E = 4.5x

Comps trade at about 20-25x this years earnings and seem just as cyclical as Schuff.

A year ago I thought normal operating income was about $30mm but the cycle keeps on surprising. At this valuation, I don’t need to give you my feeling on the non-res cycle. If the markets are doing a good job of predicting the cycle, then the stock is worth around $50-60. If you are among the short non-residential camp then, op income probably retreats to the $30mm range and over the 12 months the company pays down all its debt (backlog alone gets you about $25-30mm of true free cash flow), you get about $1-2/share in w/c being returned and with a 7x op inc multiple you end up with a $25 stock. I think a good guess is somewhere in between those two but you get paid well either way.

Backlog right now is $385mm vs $210mm at the end of last year. $120mm is probably the right backlog to generate normal $30mm of op income as 200-300% of backlog is usually realized over the course of the year and normal margins are high single digits.

Catalyst