Undervalued Continental Materials Corp Trading At 25% Discount to TBV

Johnny HopkinsStocks Comments

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One of the cheapest stocks in our Acquirer’s Multiple, Small & Micro Cap – Stock Screener is Continental Materials Corporation (NYSEMKT:CUO). With a market cap around $34 million, few investors have ever heard of this undervalued nano-cap.

Continental Materials Corporation (Continental) produces and sells heating, ventilation, and air conditioning (HVAC) products; and construction products in North America. It operates in two groups, HVAC Industry Group and Construction Products Industry Group. The HVAC Industry Group offers gas-fired wall furnaces, console heaters, and fan coils, as well as evaporative coolers. The Construction Products Industry Group produces and sells concrete, aggregates, and construction supplies; and hollow metal doors, door frames and related hardware, wood doors, lavatory fixtures, and electronic access and security systems.

Continental flies under the radar of most institutions simply because of its size and its thinly traded shares. In fact, there are no analysts currently covering the company.

A quick look at the company’s share price over the past twelve months shows the stock has risen 55% to $20.15, 35% off its 52 week high.

(Source: Google Finance)

Continental is a great little nano-cap. The company has a compound annual growth rate of 7.7% in revenues since 2013. At the same time the company has grown its earnings from ($859,000) to $3.6 million.

Continental expects consolidated sales in 2017 to exceed the 2016 level driven by stronger construction markets in Colorado Springs and Pueblo as well as increased pricing in both markets. The company’s outlook on continued growth in construction activity in Colorado Springs is supported by Colorado Springs-based real estate firm Quantum Commercial Group – which expects 2016’s strong economic trends to continue during 2017, and the Chicago-based real estate company Cushman & Wakefield — which said the U.S. economy generally, and the real estate market specifically, should perform well in 2017, surpassing the successes of the past 12 months.

The company is also benefiting from strength in U.S. consumer confidence, underscored by campaign promises made by President-elect Donald J. Trump to invest in the Department of Defense, which translates to support of Colorado Springs — a community that has long relied on defense spending and its large military presence for economic and community support.

Continental is a family owned and operated business with approximately 70% of the company’s shares held by the Gidwitz Family. The company is thinly traded with daily average volumes of just 2,600 per day. This amount of insider ownership keeps larger investors away and helps to protect Continental from institutional shenanigans. It also serves the company well in terms of its ability the manage the company prudently.

The company has a strengthening balance sheet and ability to generate solid free cash flows. Continental has reduced its short term debt from $6.2 million at the start of 2016 to $2 million for FY2016, and the company has reduced its long term debt from $4.4 million in 2013 to zero in 2016. This has been achieved using cash generated from its operations and without the need to issue additional shares, demonstrating the company’s prudent approach to capital allocation.

In terms of Continental’s valuation. The company has a FCF/Price Yield of 11% (ttm), a FCF/EV Yield of 10% (ttm), an Acquirer’s Multiple of 4.46, or 4.46 times Operating Earnings*, and the company is trading at a 25% discount to its current TBV. That places Continental squarely in undervalued territory.

You can read our full stock analysis on Continental Materials Corporation at ValueWalk here.


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