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<DAILY TROUBLE>
Tuesday, January 12, 1999
Gencor Industries Inc.
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Phone: 407-290-6000
Website: www.gencor.com
Price (1/12/98): $8 5/16
HOW DID IT FIND TROUBLE?
Heard about the seven-year itch? Gencor's November press release about fiscal 1998 earnings was aglow with six years of financial bliss. For each and every one of those years, the company had reported record sales and profits. On the surface, it may have seemed like Gencor and its shareholders were indeed a happy couple. However, the fiscal 1998 report masked a very weak fourth quarter where both revenues and net income tanked.
The uncertainty over the industrial conglomerate's citrus operations in Brazil had already watered down the once concentrated stock. The slowdown was expected and the shares were already being deconstructed after reaching all-time highs back in May. Still, the company seemed cheery.
Brazil would right itself. A backlog of construction projects would fill the coffers. In the end, the company expected a "very strong" December quarter to kick off the new fiscal year. Yet, again, appearances were deceiving. A month later the company had to pre-announce an unexpected loss for the quarter. My, what claws this seventh year has grown.
BUSINESS DESCRIPTION
Gencor makes process machinery for the transportation, food, and energy production industries. The Florida-based company's products are used in grain pelleting, oil seed production, and mineral extraction.
The company's website claims that "virtually every major innovation for the last fifteen years in energy release, heat transfer and recovery, alternative fuels, asphalt production, and the environmental sciences, as they relate to Gencor's industries, have been spawned inside one of the Gencor enterprises."
FINANCIAL FACTS
Income Statement
12-month sales: $249.2 million
12-month income: $15.1 million
12-month EPS: $1.52
Profit Margin: 6.1%
Market Cap: $82.3 million
Balance Sheet
Cash: $8.8 million
Current Assets: $105.7 million
Current Liabilities: $48.3 million
Long-term Debt: $89.5 million
Ratios
Price-to-earnings: 5.5
Price-to-sales: 0.3
HOW COULD YOU HAVE SEEN IT COMING?
September's Fortune magazine named Gencor to its annual list of the 100 fastest-growing domestic companies. It was an honor. It won't be a repeat performance. One of the prerequisites, beyond 30% annual sales growth over each of the past three years, is quarterly profitability over the four trailing quarters. With the pre-announced December loss, the company won't make the cut -- even before one considers the decimation of sales and earnings.
The Fortune list may very well be an interesting place to seek out new ideas but the lesson is clear, the road one sees in a rearview mirror is sometimes not the same one that lies ahead. As early as the summer, the company was reporting financial shortcomings -- a warning sign much more credible than any dated stock-screen analysis.
WHERE TO FROM HERE?
Despite the disappointing December quarter, a product not only of Brazilian citrus operations but also global softness in food processing, Gencor still believes it will deliver its seventh consecutive year of record growth. Don't fault the asphalt. Increased highway funding should mean big business for Gencor over the next few years. Gencor seems to think that the pavement business will more than offset deficiencies elsewhere.
The company's forward vision was flawed in November, so be wary of what a cyclical company sees over a much longer time horizon. However, the analysts agree with Gencor. They project earnings of $1.62 per share this year and $1.95 per share come fiscal 2000. While the estimates should be taken with a grain of salt, the company had, until recently, been a consistent performer. If the expectations pan out, the company is selling at just four times next year's earnings. Those values don't come around too often and, while Gencor was quick to live up the good times with stock splits and secondary offerings, it might weather the bad times with equal resilience for investors looking for a turnaround.
--Rick Aristotle Munarriz
([email protected])
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