Description

Having trouble finding something cheap? Let me convince you that something that is up 10x over the past year is still cheap.  Long story short, we think CMT is worth 40% more than it trades for today, with a likely shot at being a double + if the company can hit their low hurdles over the next year.  Core Molding has never been written up here and has no institutional coverage on a $100mm market cap. 

HISTORY

A bit of backstory about the company.  Core Molding is a pretty run of the mill manufacturer of injection molded plastics for a variety of products in different industries.  Think of things like plastic fencing, decking, snowmobile casings, trash bins, playground slides, giant blue legoman hats, etc.  It isn’t the sexiest business nor the least commoditized, but done right it can be lucrative, and that’s the key thesis.

A little under half of their revenue comes from their trucking customers Navistar, Volvo, and Paccar where CMT manufactures things like wind deflectors, bumpers, side panels, and interior plastic components for these customers.  5 customers account for >10% of their revenue, but no single customer accounts for >20% so while there is concentration risk via industry, it is somewhat mitigated by customer diversity.  CMT operates its main facilities in Columbus, OH and Matamoros, Mexico, with South Carolina, Minnesota, with a few other facilities in Canada and Cincinnati. 

It’s difficult to underscore the importance of the relationships manufacturers like CMT have with their customers.  The big customers operate on a just-in-time manufacturing platform so the turn around times from orders to shipments is quick.  Most orders come in 2-5 days before they are expected to be shipped or delivered to the client, and the client depends on the operational reliability of their manufacturers to produce goods on time.  The finished product assemblers are reliant on numerous smid sized enterprises to deliver goods in a timely basis.  Consequently, enterprises like CMT prefer to have their facilities close to the final product assembly factories to reduce the potential for transport delays.  As delays are costly to the customer, hiccups at CMT penalize not only the customer in terms of work delays, but come back to CMT in the form of payments/penalties to the customer for missed deadlines.

That’s where the story of CMT took a turn for the worse.  In early 2018, they completed a transaction for Horizon Plastics where they picked up some factories in Canada and Mexico in order to diversify the business and expand.  Operationally though, the acquisition turned out to be a mess.  The company was spread too thin and lacked to organizational control to manage the acquisition.  This led to missed deadlines across their platform and incurred numerous penalties and extra charges which in hindsight took almost 2 years to iron out.  During this period, Volvo, one of CMT’s largest customers, attempted to shop the relationship and existing contract to other potential suppliers.  These attempts backfired as they were unable to source a different supplier who could meet their needs and resigned with CMT despite the operational troubles occurring at CMT.  Thankfully, the CEO/Chairman who oversaw the acquisition “retired” in late 2018 and the new CEO David Duvall appears to be able to right the ship.

That’s not to say it wasn’t a close call.  Consequent to the Horizon acquisition, in late 2019 the company breached its covenants on it term loan with KeyBank and was in forbearance for a period of time as a result of the technical default.  Then Covid hit and the market believed the company’s prospects were dire.   What the market failed to realize was that the business had already turned the corner and was profitable again after the instituted operational improvements.  As a result, the company was able to refinance their debt in October 2020 to a Wells Fargo term loan and revolver as well as an FGI term loan. (The FGI term loan is collateralized by their assets in Mexico, which due to corporate structure are somewhat stranded from the HoldCo.)  Not only was the company able to refinance, but they were able to do so in an improved interest rate environment.  Currently, the company has about $25mm in LT debt between the loans and will pay about $1.6mm in interest cost in 2021 on this debt, which they break out nicely in their 10k

FORECAST

Management is quite transparent and highly approachable.  The CFO John Zimmer is quick to respond to questions and candid about the company and what they have been able to achieve.  It’s not often that you see a company break out its sales by client directly, but I must say it is refreshing to have that kind of transparency (nevertheless there are concerns about revealing TOO much info)

Covid had a big hit on their customers, and truck manufacturing overall was down 47% yoy which you can see reflected in their sales, but the outlook for 2021 is much more optimistic.  Although it’s early, sales should pick up to around $250mm given the improved economic backdrop.   As a result of Covid, the company did streamline their business and make some extra needed operational improvements.

Nevertheless, the past 4 quarters have been quite lumpy and difficult to parse because of various issues.  Q1 2020 was affected by offloading excess inventory, Q2 and Q3 were tough to read much into because of Covid related shutdowns, and Q4 had their large refinancing embedded.   In speaking with management, the priority focus has been returning to operational soundness and running the business smoothly.  We have confidence that the new CEO is running a compentant ship there and will be able to refocus the company on its fundamentals.  There was quite a bit of cost leakage over the preceding few years in terms of carrying excess inventory across multiple warehouses and having too many manufacturing facilities.  The consolidation of their Ohio facilities is an example of the type of low-hanging fruit the company is in the process of achieving in terms of cost saving. 

VALUATION

There is not a single driver that earnings will be dependent on, but instead a confluence of things that will shine the light brighter on the company.  The catalysts are there though, and should be enough to bump the stock with each successive hit.  Revenue recovery, realization of past cost saving measures, and new balance sheet will all help the company hit headline numbers in the clean quarters ahead.

Revenue should see a moderate recovery with margins stable around 15%.  SG&A belt tightening has already happened and I find it tough to see this management team spoiling the savings they have been able to achieve this past year.  I struggle to foresee CMT failing to achieve less than $1 per share in earnings this year, and at $11.60 I think it’s cheap given some of the upside scenarios.  Given the steady state of SG&A, any revenue growth that they are able to achieve will fall straight through gross profit to income.  That’s really where the torque in this name lies – if the company can hit the base case, then they are going to be operationally sound enough to return quickly to the better days of their revenue story where they ended up running too hot.  Notice that my bull case doesn’t even have them up to 2019 revenue levels with a stock price 2x from here.  Granted that has GM improving to 17%, but in speaking with management, that’s actually the goal they see (“high teens GM”) as reasonable due to some of the forthcoming synergies. 

The bear case is tough to see happening again given the improved balance sheet and material improvement in operations.  If it stays down from here for a prolonged period of time, I’d expect a competitor to try and scoop them up for below book value given the quality of the assets, so I think the permanent downside is pretty limited.  Honestly, this thing screams LBO but I give no credit to that.

Last thing to mention is that management is a firm believer of their prospects.  They have been consistent, albeit small buyers, and they continue to be buyers here. More importantly, given the purchases they made over the past year, none of them have turned into sellers.  Combined, management and the board own 11% of the company, so they are aligned.  Additionally, they recently eliminated their poison pill which was instituted during Covid (which I see as why they had no suitors then).

SUMMARY

Is it the cheapest stock ever? No, especially when it is up 10x from the throes of last year.  Does that mean it is expensive now?  I still don’t believe so.  The story has been significantly derisked, and the upside has reduced as a result.  I find getting into a company at <10x NTM earnings with solid prospects at growth to be a good risk to take.  Maybe I’m just a fool and should’ve bought COIN yesterday, but this is VIC

RISKS

The company guided that the winter storm in Texas and Mexico this past quarter will be a drag.  Many of their suppliers of plastic resin originate from that region, so there were supply disruptions for not just themselves, but other suppliers and manufacturers.  It should be transitory, but I would not be upset at someone waiting to see how Q1 looks before initiating a position given there might be some downside there.  It has the potential to be negative for both the revenue side in terms of demand from customers and supply side because of increase in resin costs from their origination facilities in and around the gulf.

Trucking slowdown.  Trucking is cyclical and the company gets almost 50% of its revenue from truck manufacturers.  Demand should pickup this year, but if it fails to due to semi shortage, that could push out the timing of the thesis.

Catalyst

Getting a few quarters of clean operations to demonstrate soundness

Additional investor coverage

Growth/US recovery