Blind valuation one
Blind valuation two
Blind valuation three
The big reveal
I can now reveal the names of the three companies.
1. Gencor Industries, Inc. (DE) (NASDAQ:GENC)
A manufacturer of heavy machinery used in the production of highway construction materials, synthetic fuels, and environmental control equipment.
- Current share price $9.64
- Market capitalization: $91.80 million
2. Carriage Services, Inc. (NYSE:CSV)
Provider of death care services and merchandise in the United States. The Company operates in two segments: funeral home operations and cemetery operations.
- Current share price $24.75
- Market capitalization: $458.09 million
3. McRae Industries (OTCMKTS:MCRAA)
A manufacturer of boot products targeted to the western/lifestyle and work boot markets. The Company’s principal lines of business are manufacturing and selling military combat boots and importing and selling western and work boots.
- Current share price $29.40
- Market capitalization: $72.20 million
Clearly, these are all very different businesses, and, as a result, each one should be valued differently.
The responses were varied for the whole group, but, on the whole, a net-nets approach was the most favored method for valuing company number one. Responses ranged from $9.30 to $11.
Using Ben Graham’s formula for finding the net current asset value per share (Current Assets- Total Liabilities/Shares Outstanding), using only the figures supplied, Gencor’s NCAV per share stands at $9.295.
Carriage Services is growing rapidly in a defensive, low-growth industry and is generating significant amounts of free cash flow. Over the past five years, the company’s revenue has expanded at a CAGR of 4.9%, net profit at 17.6% and free cash flow at 13.3%. Book value has grown at a CAGR of 10.7% over the period. Carriage is growing and becoming more efficient as it gets bigger. ROE has doubled over the past five years, and ROA has increased by 150%.
The one thing I didn’t note about Carriage is the fact that the company is a consolidator. The group has become extremely proficient at consolidating assets during the past few years. Therefore, there’s no reason why the company can’t continue to grow at the rate it has been since 2009.
Using a DCF analysis, based on Carriage’s current sustainable current free cash flow of $12.9 million, if the company’s cash flow continues to expand at 13% per annum for the next four years, before settling into a long-term growth rate of 10% and using a discount rate of 13%, which is higher than average but lower than the rate of 15% I’d usually use, we arrive at an implied valuation of $29.04. At this price Carriage would be trading at a historic P/E of 32.9, around the same as its closest listed peer, Service Corp International, which currently trades at a historic P/E of 32.8.
Answers for Carriage were extremely varied. They ranged from $9.42 to $25.18.
And lastly, blind valuation three, McRae Industries. Target prices for this stock ranged from $25.70 to $54.67 based on several different valuation metrics. The low-end valuation, $25.70 was based on McRae’s net asset value. Jeff Sciscilo submitted the higher price target using the following analysis:
1) BV in 2014 was $62.45M, we take a normalized ROE of 11.8% to get our normalized Net Income of $7.357M or $3.02 per share. We then multiply that by a mid-cycle normalized market multiple of 16x to get our price target of $48. In the current market and the growth of the company demand a premium of let’s say 20x normalized EPS, or $60. Assuming a required rate of return we get to $54.54/sh ($60/1.10) to get the price you would want to pay TODAY.
2) Due to a high period of current growth, extrapolating current revenue and net income growth rates is difficult. If we apply an H-model to normalized FCF using a short term growth rate of 20% (average of NI and Rev Growth rates) over the next 10 years and a terminal growth rate of 6% with a required rate of 10% you come to $54.67.