Tuesday, January 24, 2012

McRae Industries (MRINA)

  • A nanocap equity (Definition: a market cap below $50 million). 
  • A pink sheet stock that deregistered from SEC reporting back in 2005. 
  • A dual class structure controlled (presumably) by the founding family. 
  • Management that has yet to respond to information inquiries. 
Now that I’ve made sure no one is still reading this post, we can get started.

McRae Industries (MRINA) is a small North Carolina company that manufactures boots – western (cowboy) boots, work boots, and military boots. It sells its products under the Dan Post, Laredo, Dingo, John Deere, Johnny Popper, and McRae name brands. Annual sales over the last 5 years have averaged just shy of $70 million.

Now the above listed bullet points probably should have scared me off (and still might), but one overriding point peaked my interest – MRINA is one of those rare net-net stocks.  Even more uncommon these days, it is a profitable net-net.

As of October 29, 2011 MRINA reported liquid current assets (cash, accounts receivable, and inventory) of $42.416 million. This compares with total liabilities of $6.216 million for net current assets of $36.2 million. With total shares outstanding (A & B class) of 2.467 million, we get a net current asset value of $14.67. Closing price today (1/24/12) was $12.80 for a net current value upside of ~15%.

Over the past 5 years, MRINA has posted EPS numbers of (fiscal year ends last week of July):
Year
EPS
2007
$1.75
2008
$2.27
2009
$0.11
2010
$1.47
2011
$1.84

This equates to 5 year average EPS of $1.49. Keep in mind that this period includes one of the worst economic downturns since the Great Depression and saw only the second operating loss McRae in over 25 years (2009 reported an operating loss despite adjustments keeping EPS positive). On a price-to-earnings basis, this is a current P/E ratio of 8.6x, and earnings yield of 11.6%, and a Return-on-Equity of 7.6%. 


Cash Conversion
Jul-11
Jul-10
Aug-09
Aug-08
Jul-07
Reported Net Income
$3,829
$2,952
($514)
$5,041
$3,818
Cash From Operations
$2,234
$770
($1,075)
$5,420
$2,470
CFO/NI Conversion
58.3%
26.1%
n/a
107.5%
64.7%
Free Cash Flow
CFO - CapEx.
$1,412
$401
($3,131)
$5,232
$2,048
Net Income + Depr./Amm. - CapEx.
$3,636
$3,151
($2,006)
$5,338
$3,971
Free-Cash-Flow Yield
Shares Outstanding:
2,467
Current Price:
$12.80
Market Cap
$31,578
FCF Yield
CFO - CapEx
NI + D/A - CapEx
1 Year Avg. FCF
4.5%
11.5%
3 Year Avg. FCF
-1.4%
5.0%
5 Year Avg. FCF
3.8%
8.9%
(*all values in $,000’s unless otherwise noted)

One concerning item, however, is free-cash-flow (FCF). If we look at the statement of cash flows, MRINA’s Cash From Operations (CFO) has been substantially less than Net Income in 4 of the last 5 years. Depending on how you think of FCF, this may be a manageable risk since most of the drag on CFO has been additional working capital requirements. Does MRINA require additional working capital to maintain its competitive position and unit volume, or is this just balance sheet rebuilding after major inventory liquidation in 2009? Is the inventory build mainly in the military business, which MRINA cites in its 2011 annual report as “highly competitive as a result of troop draw-downs in Iraq and Afghanistan and the U.S. Government’s excess inventory of several styles of combat boots”?   Before I get a comfort level with MRINA more clarity on inventory will be an area of focus.

Still, I remain intrigued with this company. An 8.6x 5yr average price-to-earnings ratio, a 2.8% dividend yield, an invested and controlling family, and best of all – trading firmly in net-net territory. A few questions for management:


  1. Can we get detailed financial information for 10+ years? 
  2. Can you explain the dual class structure, class rights, and disclose who the primary owners of both A & B classes are? 
  3. Sub question: Have any of the controlling shareholders announced share liquidation plans? What were the most recent insider transactions? 
  4. Can you provide some segment level detail on inventory? Is the growth in inventory mainly military, western, or work boots? 
  5. Can you talk about the operating loss in 2009 and how that adjusted to an EPS profit? Are the adjustments all related to the sale of Compsee or were there other events? 
  6. What is management’s stance on the net-net status of the stock? Is there any plan to pursue value enhancing strategies (i.e. asset sales, additional share buybacks, etc.)? 
  7. On the Statement of Cash Flows, there is a “Purchase of land for investment” line-item. Can you explain this investment? Is this property for future growth? Is it strictly for investment? 
I will keep you posted as I move forward with my MRINA research.

Disclosure: No current position, but reserve the right to initiate one at any time (if I can find the shares – MRINA trades extremely low volume).


Harvest Investor © 2012. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advices, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

14 comments:

Anonymous said...

Really interesting company and analysis. I enjoy reading your blog.

Anonymous said...

I think you can find a lot of your questions answered on Edgar. Annual reports back to 1995.



http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000729284&type=&dateb=&owner=include&start=0&count=40



for example from earlier Annual report WRT Class A and Class B


10. SHAREHOLDERS' EQUITY

Common Stock
Each share of Class "A" Common Stock is entitled to one-tenth vote and each
share of Class "B" Common Stock is entitled to one full vote at meetings of
shareholders, except that Class "A" shareholders are entitled to elect 25 %
and Class "B" shareholders are entitled to elect 75 % of the directors. Each
share of Class "B" Common Stock can be converted to Class "A" Common Stock on
a share for share basis. All dividends paid on Class "B" Common Stock must
also be paid on Class "A" Common Stock in an equal amount.


Thanks for looking into this company - I will be following it.

Spike said...

Anonymous#2:

Thank you for the pointer. You are exactly right that historic SEC data is available prior to the late 2005 registration termination. From that, we can construct most of our 10 year history (missing 2006 financial statement info) and see who owned what percentages of the stock as of delisting.

Even with this history, I'd still like to see if management would provide annual reports for 2008, 2007, & 2006 just to get a better understanding of the operation. Also, updates on questions #2 & #3 listed above would be helpful. Questions #4-7 would all still need to be answered as well.

Thanks again for taking a look at MRINA with me - it's always nice to have other value investors kicking the tires with me.

Anonymous said...

From what I read I feel someone like J.R. Ewing and family owns this company.

Anyway - I will be interested to hear if you learn anything further.

Off topic - If you are looking for net-net companies I think the best sector to look these days is natural gas - do you look there at all?

Spike said...

Thank you for the comment - I haven't had much luck (yet) in getting in contact with management. Do you have any links to articles about the controlling family? On net-nets, I haven't seen any natural gas companies that jump out (most I look at have such massive PP&E that they're nowhere near net-net territory). Do you have any tickers? I'm always looking for new ideas / new evidence. Thank you.

Anonymous said...

Hi,

I could not find any specific articles but could piece together some rough info. It seems his family and he are large shareholders. Another McRae is an executive (son, brother?) Nothing wrong with that. Given the share class structure (A and B) they probably control the board selections.

McRae also owns a land development company by a North Carolina Lake. His wife (I am guessing its his wife) is an agent there.

http://www.newsouthrealty.com/Kat.aspx

I would guess that the "land purchase for investment purposes" relates to this company. Nothing wrong with that as the board approved it. But if this were a more widely held stock it would be criticized - like Frank Stronach of Magna buying horse racetracks with company money.

With respect to natural gas companies, thanks for your comment. My comment came from a BNN interview yesterday where the analyst listed a number of companies where the market had severely discounted future reserves. Not really a net-net as you point out.

Thanks

Anonymous said...

I could not find any specific articles but pieced together a little info. The McRae family are major stockholders and with the Class A/B structure probably control the board (I am sure you know that.)Probably a brother/son of the president (Gary)is also an executive.

Gary and I believe it is his wife also own a real estate company on a lake in North Carolina.

http://www.newsouthrealty.com/Kat.aspx

I am guessing that the company "land purchase for investment purposes" relates to this project (just a guess). Nothing wrong with that. But if the stock were more widely held it would be criticized. Like Frank Stronach of Magna buying horse race tracks with company money.

But the blurring between private/family objectives and public company objectives would make me a bit reluctant to invest in this company despite the financials.

With respect to natural gas, my comment came as a result of a BNN interview yesterday where the analyst listed a few companies where the market had significantly discounted future reserves. Not really a net-net as you pointed out.

Spike said...

Thank you for the follow-up. I definitely share your concerns about the management structure. It can be a double edged sword (financial incentive vs. lack of accountability) to have a controlling family on these nano-caps - probably the reason I haven't been researching this company as diligently as I would another net-net. Still, I hope to make contact with management and dig a little deeper.

Natural gas is a very interesting play, with companies like CHK shutting down rigs in the Barnett and the gas/oil ratio at or near historic highs. I just can't get my hands around whether it's a value opportunity or if unconventional plays have truly shifted the supply curve down and to the right.

Anonymous said...

I don't mean to hijack this thread into a natural gas discussion. I am interested in your McRae investigation.

If you have an interest in natural gas I would enjoy reading any ideas you have in this sector. Personally I only have my intuition that we will not see gas prices this low again. I would like to hedge my own heating bill at this price forever.

Chesapeake is scaling back production as you say, as are others. But Exxon is not. A big part of their future depends on gas and they just believe gas demand will be there.

For example Westport Innovations (TSX) provides natural gas conversions for industrial diesel and gasoline engines. Their revenue is growing 80% yoy.

Large fleets and ferries are converting now all the time.

While NA is flooded with supply Europe is freezing. LNG projects are starting to pick up.

Unconventional supply has shifted the aggregate curve down and to the right absolutely. But a lot of the unconventional supply is in geographical areas that have not traditionally had natural gas supplies. So it will take time for markets to adjust and infrastructure to be put in place, and for customers to realize the cross elasticity of demand with oil as prices rise, and the value in moving to gas.

To me it just feels like waking up and seeing oil at $20 a barrel.

OK - I hijacked your thread. Sorry.

Spike said...

I agree completely that it will take time for the market to adjust and infrastructure to be put in place for Natural Gas. Finding who'll benefit from that transition is the million dollar question. Also, having the stomach to wait out the transition will likely be difficult. I wish I had some ideas to pass along, but it's not an area I've spent enough time researching to offer anything of relevance.

Anonymous said...

Mcrae article fyi -

http://seekingalpha.com/article/366981-mcrae-industries-this-company-is-hard-not-to-like

Anonymous said...

FYI - a few blogs are targeting McRae. I am close to trying to take a position - ("try" because it sounds like shares are tough to come by.) What do you think? Have you bought any?

http://www.whopperinvestments.com/a-pinksheet-net-net-gem-mcrae-industries-mrina

Spike said...

I have not yet bought any - still kicking myself for not initiating a position back at $12.80. Management never responded to my emails, and I didn't press them with a phone call (my own fault).

Price move today takes them out of Net-Net territory (close of $15.50 > NCAV of $14.80).

Not that this means they're no longer cheap. Depending on your growth outlook and what ROE you think MRINA can consistently earn, the stock is still priced well below book value. However, I'll stay on the sideline and wait for another opportunity. Take this for what it's worth though, I'm likely "anchored" by the $12.80 price I missed. Oh well, another train will be through the station in a few minutes. Back to scouring 10K/Q's.

Anonymous said...

http://www.marketwatch.com/story/mcrae-industries-inc-reports-earnings-for-the-second-quarter-and-first-six-months-of-fiscal-2012-2012-03-28