Value Find: MISCOR Group, Ltd.
Not all microcaps have recovered since the August market meltdown, which could spell opportunity for investors who are looking in the right places and are willing to roll the dice.
Case in point is South Bend, Ind.-based MISCOR Group, Ltd. (OTC: MCGL). Shares of the scrappy $40 million market capitalization industrial services provider have been sliced in half since July. Over this time, the only news out of MISCOR has been the release of its fiscal second quarter earnings report. Earnings weren’t great, but they certainly weren’t bad either.
While microcap MISCOR trades on the lowly OTC Bulletin Board, it has been on our radar for the past year, given that it has a very credible major financial backer in hedge fund group Tontine Associates. Headed by Jeffrey Gendell, Tontine has wracked up 35%-plus net returns per year on average. In January, MISCOR shares began a sharp rally upon the announcement that Tontine had invested $12.5 million in the company as part of a recapitalization.
MISCOR shares hit a high of $0.45 in mid-July before beginning a sharp retreat. As of this writing, MISCOR shares are changing hands for just $0.205, almost in line with the $0.20 a share that Tontine paid for the stock in its January private placement. Tontine isn’t infallible (one of its hedge funds has performed poorly this year), but whenever we can buy a stock near the price a smart hedge fund paid for its position, we generally sit up and take notice.
Founded in 2000 by industry veteran John Martell, MISCOR has grown into a 450 employee company with 13 service centers in five states through a combination of acquisition and organic-driven growth. Ranked on the Inc. 500 list in 2004 and 2005, MISCOR’s goal is to build a national leader in the unglamorous, but underserved and growing industrial services sector. Blue chip clients include names like United States Steel Corporation (NYSE: X), Luxembourg-based ArcelorMittal, Union Pacific Corp. (NYSE: UNP), CSX Corporation (NYSE: CSX), Marathon Oil Corporation (NYSE: MRO) and France-based Alstom S.A.
MISCOR serves two segments of the “aging industrial backbone:” repair, remanufacturing and manufacturing (RRM), and construction and engineering services (CES). The RRM segment includes maintenance and repair for industrial motors, generators and lifting magnets. Additional services include diesel engine component manufacturing, remanufacturing and repair services. The CES segment includes electrical contracting, engineering and repair services for electrical power distribution systems in the industrial, commercial and institutional sectors.
For the fiscal second quarter ended July 1, MISCOR reported revenue of $16.8 million, a 16% increase from revenue of $14.5 million a year earlier. Revenue growth was partly driven by an acquisition last May. RRM revenue increased 12% to $12.1 million and CES revenue leapt 26% to $4.6 million. Net income for the quarter was $0.21 million, or $0.00 a share, compared with a loss of $1.1 million, or $0.01 a share, a year ago. The improved bottom-line performance was driven by higher sales and lower interest expense as a result of the company’s recapitalization.
MISCOR ended its fiscal second quarter with $1.25 million in cash on hand and approximately $5.2 million in net debt outstanding Even with access to a $5 million line of credit, the company remains capital constrained. MISCOR would have to raise additional capital as part of any decent-sized acquisition. Thus, some future dilution looks likely. This isn’t necessarily a bad thing, though, as a smart acquisition or two could be well received by the market. On this front, MISCOR is a bet on the ability of CEO John Martell and Tontine Associates to create value.
Martell and Tontine have significant “skin in the game” with ownerships stakes in MISCOR of 45% and 27%, respectively. Prior to founding MISCOR, Martell was a founding shareholder of Trans Tech Electric Inc., which, along with three other companies, became founding members of $3.5 billion market capitalization Quanta Services, Inc. (NYSE: PWR). Martell served as a member of the founding board of Quanta Services until May 2001. Martel could strike out with MISCOR, but this is someone who should know the business and looks to have a credible team behind him.
At recent price levels, the stock checks in with an enterprise value of approximately $45 million. This values the stock at 0.7 times its run-rate revenue of $67 million. Even for a lower-margin business, this valuation looks inexpensive if MISCOR can start dropping more to the bottom-line.
MISCOR can probably best be described currently as a “public venture capital bet,” given its high-risk, high-reward profile. The industrial services sector is one of scale and execution. Even with solid execution and improved scale, MISCOR could be caught by an overall economic slowdown or an unforeseen event. Plus, given its status on the OTC Bulletin Board, there is no analyst coverage and trading volume is light, so sharp volatility in this stock is par for the course.
Bottom line, MISCOR is a “value find” that should only be considered for aggressive, high-risk oriented investors.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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