There were a few lovely little surprises this earnings season but none brought a smile to my face more than hearing that STRL had hired Ron Ballschmiede as their CFO.
Ron was previously the CFO of CBI, including the six years that I was a sell side analyst covering the E&C industry, and he is great.
To be frank, he joined CBI when it was in a period of dire need after one of those ridiculous petite-scandals that corporate america engages in every so often. In this case, in 3Q 2005 the company delayed filing its 10Q b/c of alleged accounting issues and then in winter 2006, filed this statement paying an underling in the accounting office $1.7M in hush money. A few days later, the CEO and CFO were fired. Phil Asherman, a former FLR biz dev guy was elevated to CFO and Ron was hired six months later.
I recall, during his tenure as CFO, in no small detail and with plenty of professional regret on my part, when CBI was losing boatloads of money on an LNG regas project in Wales (a project he inherited mind you), when much that could go wrong did including a labor force protesting work conditions daily and in 2008 the rainiest summer in UK history, when the company's balance sheet was so stressed it had $88M in cash compared to $1B in deferred revenue (ie cash collected from customers ahead of work to be completed), when it seemed to me the company was close to running out of money and I had a conversation with him where he calmly reiterated that construction companies - contrary to popular opinion - don't need a lot of cash on hand as long as the customers are willing to patiently accommodate temporary problems.
He was right, I was wrong, and the shame on my part was downgrading the stock in 4Q08 when shareholder equity was ~$600M vs $2.9B today.
I learned a number of lessons in that experience, as an analyst and as an investor, and also gained an enormous amount of admiration for a guy who is now the CFO of our wee +$90M mkt cap company that is also in need of an accomplished CFO who can lay the foundation of a professional organization. It should bring a smile to all the faces of STRL investors b/c he knows the construction business, the processes, the accounting and the institutional investors well in excess of what should be expected in that role and for a small company such as ours. We are lucky to have him. (He's also the person who hilariously once counselled me, "If you sit down at the airport, you've arrived too early").
Second to that satisfaction is a little vanity on my part seeing the amended 10Q STRL just filed. Something about the initial Q struck me as weird when they reported a swing to losses in the the Myers JV. So after the earnings call I asked the interim CFO about it (he is wonderful in his own right and for many sound reasons has zero interest in being a full-time CFO) and I really liked his frankness: "those parenthesis you see, they don't belong there."
To avoid this mistake in the future, I offered to proofread their filings a few days before their release but I doubt that's something anyone will oblige.
Other good surprises for the quarter included ...
FTLF: Getting back on track with revenues up 14% y/y and now having lapped the worst of its channel disruption and with the IFIT acquisition under its belt on track for $30M revs and 10% EBITDA margins, still trading at just 6x proforma EV despite growth and profitability.
EVI: The quarter wasn't great b/c of a delayed equipment delivery but customer deposits were the highest ever at $5.8M and a special $0.20 dividend was declared. I also just attended my first shareholder meeting and got a firsthand account of plans / expectations for buy / build strategy and how they intend to consolidate their fragmented, regional and balkanized industry. While I fear equity dilution to fund future deals, the suggestion that they use rights offerings to raise money would allow investors to substantially maintain their ownership levels.
ARIS: Still flying under the radar despite top line growth, cash generation and margin expansion. Returns are expanding to low teen ROE and ROA and high S/D ROIC. With several acquisitions under its belt, and I believe a focus on customer retention and organic growth, I see a lot left in the tank for a company whose stock is trading at 11x EBITDA vs a peer group north of 15x.
... of my larger holdings sadly only STLY continues to underperform. My initial views on the company was that the furniture business sucks, that management destroys value, that there's no growth, no margin, no competitive advantage, and that it's not a business I want to own. Somehow I convinced myself that activist investors who own large chunks of it would push out the CEO and turn things around but in talking recently with a source in the business, as he put it: "there are always wall street folks who think they can turn it around. It has a great brand within the industry, but customers have no idea what it makes, their styles are out of fashion and the industry's distribution model is broken."
While STLY doesn't put a smile on my face, I was more right than wrong in the quarter and more importantly the lessons I learn today as I continue to grow in this business will, I believe, provide a framework for better decisions in the future.
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- Long Cast Advisers
- Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com