Sunday, November 18, 2012

CNRD 2012Q3 Results - Many things are going right

When I initially invested in CNRD 20 months ago, the investment thesis was a simple one: CNRD, a well-run shipyard located at the Gulf of Mexico, was adversely affected by the Deepwater Horizon oil spill. I reasoned it would only be a matter of time oil/gas exploration in the region would return to normal and CNRD's business would recover. This is a classic case where investment opportunities are created by temporary industry-wide downturns.

Since then, instead of passively waiting for tide to turn, CNRD has proactively replaced its revenues from the energy sector with revenues from other commercial and government clients. Now, from their third-quarter filing, we can see a few tailwinds are in play:
  • Backlog is growing healthily. If we assume the run rate of first 9 months continues, annual earnings will come in at about $3/share. Shipbuilding is a cyclical business. Anecdotal evidence suggests we are now entering the up-cycle in inland water transport. CNRD is now riding this high tide. (For anyone interested in intels in the barge industry related to CNRD's operations, check out the Credit Bubble Stocks blog.)

  • CRND is preparing to submit claims to the BP Settlement Fund. The claim amount is expected to be around $22-23m. Remember that CNRD's market cap is about $110m. So, we are looking at an potential one-off 20% (pre-tax?) boost to its intrinsic value.

  • Oil/gas exploration at the Gulf is recovering but not in full swing yet. While revenues from oil/gass industry has improved to 12% of its total revenues, it's still far below the 27% before the oil spill or 40%+ before the GFC. Gross margin from its repairing and maintenance segment has improved to 15%, but is not yet back to long-term average of 20-25%. When oil/gas operations in the region are back in full force, there will be a continuous supply of repairing/maintenance work. But vessels which have just been moved into the Gulf won't need maintenance immediately. There will be a time lag.

  • The company has repurchased about 2.5% of its shares in 2012 so far.

  • Since Jr Conard took over the CEO role in 2004, this is the first time the company has engaged a financial adviser "to assist in its evaluation of strategic initiatives in order to determine potential alternatives that will enhance shareholder value and provides us with flexibility to respond to potential future business opportunities and risks." This can mean anything. It can also mean nothing. One possibility: Senior Conrad is in his 90's, well past his retirement age. The likelihood that CNRD will put itself up for sale is higher than ever. 
I am patiently waiting for the plots to unfold.

(Disclosure: Long CNRD)


  1. Long CNRD and am hoping for a new initiative (special div, regular divs, tender offer, co up for sale, etc) with the hiring of a financial advisor. In the 2011 Annual Report, it states that a financial advisor was hired in 2007 and the recommended action was buying back stock.

    1. I wasn't aware they hired a financial adviser in 2007. That tells you how careful I was when I read the financial statements. LOL.

      Thanks for the info.

  2. Thanks for the link.

    Any kind of a dividend would be a mistake at 2.4x EBITDA. The right move is share repurchases. Most intelligent would be borrowing $10-20mm for ten years at a low interest rate, taking some of the extra cash, and tendering for shares - trying to retire as much of the public float as possible.

    1. Good thoughts.

      I suppose most owner-operators are not that "adventurous" in capital allocation. Maybe a LBO is the best outcome here, unless you are interested in "hold forever".

    2. I agree I prefer a tender but I would take a dividend over cash just sitting there.

  3. Am a value investor from India. Well done. Good blog.