Canam Goes Private

It feels like just last month that I was discussing Canam Group (CAM) as a new potential value investment - because it was. Thanks to extraordinarily lucky timing, I no longer own any shares, as last week the company's management (in concert with private equity) decided to take the company private.

Canam Group

Canam Group (CAM) is a previous holding of mine that has gotten very cheap again. I have written extensively about this stock in the past here.

Canam: Sold

One of the longest-standing members of the Stock Ideas page is Canadian manufacturer Canam Group. Today, Canam trades near multi-year highs, and so I've sold out of my position.

The Power Of Inside Knowledge At Canam

There is a great deal of evidence (one example here) that company insiders (e.g. senior managers) who trade in the stock of their firms do beat the market. Theoretically, this shouldn't happen, as insiders may only trade as long as they are not in possession of material, non-public information. But this is a difficult line to define, as recent events at Canam Group illustrate.

Revenue Timing

Canam (CAM) has dropped some 15% in the last few days, as the company reported a loss in its first quarter earnings results last week. However, Canam has been discussed on this site as a stock idea with long-term potential for gains due to its stable operating model and growing backlog. As a result, temporary pullbacks in the form of revenue timing issues appear to offer long-term investors an excellent buying opportunity.

While the market appears focused on the fact that revenue dropped from $180M to $105M in the first quarter (a large drop by any standard), it's important for long-term investors to look behind the numbers to understand the long-term implications. As a company that designs and builds large-ticket construction products that require long lead times, recessions will hit this company later than it will most. As a result, the slowdown in the economy that occurred in 2009 has only hit the company now. The important indicators for forward-looking shareholders, however, are the company's booking rates.

For Canam, booking rates have been out-pacing revenue, as the company's backlog is now at a record level, though the company has been in existence for 50 years! The company's backlog over the last several quarters is shown below:

There are two main reasons for the large backlog. First, the company has been building roofing installations for two large stadiums (BC Place in Vancouver and Marlins' Stadium in Miami), but isn't scheduled to start delivery of those structures until the second quarter. (In this case, revenue cannot be booked until delivery has taken place.) These contracts alone are worth $180M; compare that to the company's first quarter revenue of $105M. In essence, revenue from the first quarter was simply pushed to revenues in future quarters, making first quarter revenue look poorer than it was, but making future quarters look better than they should.

Second, with prices depressed among competitors and complementary businesses, Canam has been at work acquiring companies, including Tennessee-based FabSouth, which added another $100M+ to the company's backlog. Since FabSouth was not fully consolidated in Canam's results until most of the first quarter was complete, these revenue numbers don't show the full impact of Canam's full business. But as the company works through its record backlog (and it expects to deliver all of its current backlog within a year), those revenue numbers will see strong sequential growth.

Investors focused only on quarterly earnings are sure to make poor decisions when it comes to making purchase decisions for the long-term. For companies dealing in large-ticket items, revenue timing issues can play a significant role in any one quarter's results. As such, it's important that investors think about the company's business from a long-term perspective to put themselves in a position to properly value a company's stock.

Disclosure: Author has a long position in shares of CAM

Earnings Pops

For companies with high fixed costs, earnings are particularly sensitive to drops in revenue. As a result, we have seen many such companies show negative earnings over the last few quarters. But while reported revenue figures have continued to decline, some backlog numbers have started to tick up, suggesting that for some, higher revenue is on the way. This higher revenue can translate into much higher earnings for companies with fixed costs. For such companies that currently trade at low earnings multiples, strong price appreciation potential exists.

For example, consider Canam (CAM), a company that specializes in designing and building heavy-construction components. Year-over-year quarterly revenue is down over 30%, resulting in a reduction to operating income of over 60%. Despite the revenue shocks, the company has managed to eek out small profits every quarter, and now trades at a P/E multiple under 10 using earnings over the last four quarters.

But these are trough earnings for a company with high fixed costs. Consider the company's backlog over the last several quarters, shown below:

It would appear that revenues will soon be on the mend. Furthermore, subsequent to the end of the Q3 2009 quarter, the company was awarded a $100+ million contract to help build the new roof for BC Place Stadium in Vancouver, which is not included in the above chart.

In addition to the fact that Canam trades at a cheap multiple to trough earnings, Canam has no net debt, and management has recently signaled that it will be buying back and canceling shares. For value investors looking to buy good businesses at attractive prices, Canam may offer such an opportunity.

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Disclosure: Author has a long position in shares of CAM

Ignoring The Headline Number

When quarterly earnings reports are released, investors tend to focus on the headline numbers. Were earnings 12 cents per share or 11? What does this mean for next quarter's earnings? For long-term investors, the discussions that follow these questions are essentially useless. Long-term investors want to know how the business is doing, and must therefore train themselves to ignore what may be important to speculators.

Consider Canam (CAM), an industrial manufacturer involved in large-scale construction projects. The headlines read that earnings in the most recent quarter fell by 30% year over year, suggesting the company is being battered by the recession. A closer look at its income statement reveals a very different story: sales are up 11%, and operating earnings are up about 10% over last year. The earnings shortfall is mainly due to a non-recurring tax difference between this year and last year, and after-tax losses (compared to after-tax gains last year) of a company in which Canam has an interest.

Another important note missed by the headline number: order backlog is down about 10% from this time last year. While the current backlog of $280 million still represents about 1.5 quarters worth of sales, investors should keep an eye on this number going forward to avoid negative surprises.

Traders and speculators base their decisions on the headline numbers. Value investors must dig deeper to find out what the business is worth.

For a more detailed discussion of Canam as an investment opportunity, see this article. Though stock in Canam has risen more than 40% since we first discussed Canam as an undervalued investment, it still appears to offer long-term value.

Disclosure: Author has a long position in shares of CAM.

Canam Building Up

Canam Group (CAM) is a US and Canadian infrastructure play. The company builds arenas, bridges, highways, you name it. While many big ticket items have been shelved due to the current state of the economy, government infrastructure spending has increased and is poised to continue to do so. But don't take my word for it: the company's order backlog at the end of 2008 was around $300 million, flat with year ago levels.

The company also managed to earn $1/share in 2008, with a fourth quarter and full-year result fairly flat against year ago levels. But the stock price recently dropped to below $5, offering long-term investors the opportunity to buy in at a pretty good price! CAM's debt to equity sits at just 17%. Combined with the fact that it is in a contract-based business and therefore has some revenue certainty (and can therefore align variable costs with revenues in advance), it's a very safe bet that this company will emerge from this recession unscathed.

While many companies are too afraid to buy back shares in this economy not knowing what's ahead, Canam management knows its shares are cheap. They have been buying back shares, and have indicated that they will continue to do so, without levering up. Their bridge plants are at full capacity for the next 18 months, which gives management the confidence it needs that its business conditions are okay.

On the conference call last week, CEO Marcel Dutil emphasized that this is now his fourth recession in charge, and Canam is better positioned now than at any other time (looking at Canam's D/E in previous recessions shows this to be very true!). He stated that 2009 and 2010 will be years of growth for this company, which is something rarely heard in the corporate world today!

The market has punished the shares along with the overall equity market, but with a P/E of 5, a P/B of .5 and a safe capital structure, value investors may see great profits with this stock in the next few years.

Disclosure: Author has a long position in CAM