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Gencor Industries: A Deep Value Stock Poised To Profit From Infrastructure Spending – Gencor Industries, Inc. (NASDAQ:GENC)

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A Perfect Storm With Brisk Tailwinds

These are exceptionally good times to be involved with highway construction, in view of the generally accepted belief that America’s infrastructure has been woefully neglected and is in need of massive (and expensive) government attention.

Fortuitously, this belief is now colliding with a federal government focused upon a coronavirus-propelled agenda of creating employment and flooding the U.S. economy with greenbacks. As a leading provider of heavy equipment used in producing highway construction materials, Gencor (NASDAQ:GENC) is well-positioned to benefit from this imminent orgy of spending.

Gencor’s product line includes asphalt plants, combustion systems, and fluid heat transfer systems. The demand for these items is largely driven by crude oil and carbon steel prices.

Crude oil prices are the major determinant of the liquid asphalt costs borne by users of Gencor products, and they also contribute to freight costs. Carbon steel, meanwhile, is the primary raw material used in the company’s products.

Once again, fortune is smiling upon Gencor. The Saudi Arabia/Russia price war has plummeted crude oil prices into depths not seen since 2002, while virus-related declines in steel demand and prices are clearly in evidence.

When one considers the many positive circumstances that surround Gencor, one might well assume that its stock would be selling at an astronomical price befitting its prospects. One would, of course, be incorrect. In the world of small-cap stocks like Gencor, price sometimes takes a respite from reflecting value – especially when the market gets a bit chaotic.

This is one of those times.

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Sometimes The Sum Of The Parts Is Greater Than The Whole

Gencor has two parts: a business that makes things and a sizeable investment portfolio that currently dwarfs the business. Assuming that the investment portfolio is worth $114.7 million (see Table 3 below), the business is currently valued by the market at $35.5 million (see Table 1). Inasmuch as that business earned $10.5 million in 2019 (see Table 2), has been consistently profitable for several years, and has attractive future prospects, a $35.5 million valuation seems ludicrously low.

The elephant in the room here is my valuation estimate of GENC’s portfolio (Table 3). We don’t know the exact nature of what is in that portfolio today, so I’m operating under the assumptions that:

  1. Its composition hasn’t changed since 12/31/19, and
  2. The performance of GENC’s money managers has mirrored that of the GOVT, HYG, and SPY ETFs for the portfolio’s government securities, corporate bonds, and equities, respectively.

Table 1

Enterprise Value Calculations – GENC

($000,000’s), except for percentages





$ Change

% Change

Market Cap





less: Cash & Securities





plus: Long Term Liabilities




equals: Enterprise Value (EV)





Enterprise Earnings (EE)






Table 2

Enterprise Earnings (EE) Calculations – GENC


TTM Net Income @ 12/31/19


less: Pre-Tax Investment Income


plus: Tax On Investment Income


equals: EE


Table 3

Cash & Securities Valuation – GENC

($000,000’s), except for percentages

2020 Value




Cash and Cash Equivalents




Government Securities




Corporate Bonds








Mutual Funds




Exchange-Traded Funds




Total Cash & Securities



Government securities: Assume 8.5% increase, based on GOVT ETF returns

Corporate bonds: Assume 12.4% decline, based on HYG ETF returns

Equities: $14.1 million: Assume 21.3% decline, based on SPY ETF returns

Mutual funds: $4.1 million: Assume 21.3% decline, based on SPY ETF returns

Exchange-traded funds: Assume 21.3% decline, based on SPY ETF returns

Mutual funds and ETFs are assumed to be invested in equities


Seeking Alpha Key Data

Gencor 12/31/19 10-Q

Google Market Summaries (ETF quotes)

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Gencor’s Margin of Safety

Subject to a wide variety of risks, I believe $219.7 million to be a fair price for Gencor in its entirety, implying a price of $15.06 per share. This valuation is based upon:

  1. Cash and securities having a market value of $114.7 million, and
  2. A 10x multiple applied to TTM enterprise earnings of $10.5 million (i.e., $105 million)

Since GENC’s 3/27/29 closing price was $9.59, this works out to a $5.47 per share margin of safety (i.e., $15.06-9.59). In my opinion, this 36% value cushion is likely to comfortably buffer whatever might be lost to stronger-than-expected headwinds during the coming 12-18 months.

Risks Faced By GENC Stockholders

There are a variety of risks associated with owning GENC stock. Among them are the possibilities that:

  • Securities held by GENC may have underperformed market averages to an extraordinary extent since 12/31/19.
  • Adverse economic conditions may cause customers to delay or forego their purchases.
  • New or existing competitors may lure business away from GENC and/or adopt aggressive pricing policies that cause its profit margins to decline.
  • Local, state, and/or federal government policies adverse to the highway construction industry may be adopted (e.g. environmental).
  • GENC may be unable to pass along significantly higher crude oil and/or carbon steel prices to its customers.

Consider these risks, as well as the illiquid nature of GENC stock, which is likely to result in large losses if investors seek to sell their positions quickly.

Disclosure: I am/we are long GENC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Nothing in any Seeking Alpha articles (or other Seeking Alpha content) authored by me constitutes a recommendation by either Oyster River Financial, LLC or me to buy, sell or hold any specific security.

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