A note: Recently the blog has been having issues with some readers being redirected to a sketchy Chinese pharmaceuticals site. I believe the issue has been resolved, but please reach out to me if you encounter anything weird. Much appreciated!

It’s been a little while since I did a post on a major holding of mine. For those tired of random value ideas and OTC curiosities, here’s a profile on a company where my firm has meaningful capital at stake.

Before I begin, let me offer some words of caution. Shares of Crawford United are highly illiquid. Investors must use caution when attempting to transact. Crawford United is a tiny, insider-controlled company and the ability of outside shareholders to influence the company’s in any way is extremely limited. Please do not buy or sell shares of Crawford United (or any other security mentioned on this blog) without doing your own in-depth research.

Crawford United is a Cleveland-based holding company with interests in multiple industrial subsidiaries. Founded as “The Hickok Electrical Instrument Company,” the firm has been in existence for over 100 years. Like most other companies of similar vintage, Crawford has seen its share of ups and downs. For most of its existence, Crawford served the automotive industry. As the Big 3 struggled in the early 21st century, Crawford’s fortunes declined and losses mounted. The company began extricating itself from the automotive industry with a series of highly accretive acquisitions, the first in 2017. Today, the company is highly profitable, well-financed, and cash generating. The company’s shares have responded, but the market does not yet fully appreciate the magnitude of Crawford’s turnaround. Shares of Crawford trade at around 8x 2020 earnings with meaningful earnings growth potential.

Today’s Crawford United consists of three segments, each acquired within the last three years.

Federal Hose was acquired in July 2016 for $1.65 million in Crawford stock and $4.8 million in promissory notes. The Painesville, Ohio company is a manufacturer of hydraulic, metal, and silicone hosing for industrial applications.

Next came Akron, Ohio’s Air Enterprises in June 2017. The company paid $10.25 million, funded almost entirely with revolving and term loan facilities from JP Morgan. Air Enterprises designs and engineers air handling systems for large facilities like hospitals, factories, and arenas.

Crawford completed its acquisition trifecta with the July 2018 purchase of CAD Enterprises in Phoenix, Arizona. For this manufacturer of precision aerospace components, Crawford paid $21 million. $12 million was paid in cash and the balance in a subordinated note.

In June 2018, Crawford divested its legacy automotive testing unit. With the move, Crawford formally ended its century-long involvement with the automotive industry.

In total, the company invested $38 million over three years to reinvent itself. The outcome has been wildly successful. I believe the company’s purchases were both well-priced and well-timed. Below is a look at the operating results of each segment over the last twelve months.

All of Crawford’s segments are operating profitably, but the Air Enterprises figures leap off the page. The segment (purchased for only $10.25 million) produced operating income of $7.8 million over the last four quarters. That is an absolutely eye-popping figure. In the two full years it has owned Air Enterprises, the subsidiary has already earned more than its purchase price in operating income. How on earth did Crawford manage this? Was this the mother of all distressed purchases? In short, the answer is yes. Crawford bought Air Enterprises from Data Cooling Technologies, LLC. At the time of the Air Enterprises transaction, Data Cooling Technologies was experiencing extreme financial difficulties. Selling Air Enterprises was a last-ditch and ultimately unsuccessful effort to stave off bankruptcy. Crawford was in the right place at the right time, cash in hand.

While Air Enterprises is Crawford’s star, its other acquisitions are also solid performers. In particular, CAD Enterprises positions the company well in the lucrative aerospace components market. The highly specialized and regulated nature of the industry limits entry by new competitors, and the long-term growth of international aviation should increase demand for the segment’s services. Federal Hose doesn’t appear to have much revenue growth potential, but it has produced robust earnings and margin improvement in recent years.

For the last four quarters, Crawford reported operating income of $10.2 million, or $1.5 less than its operating subsidiaries’ EBIT. That $1.5 million in corporate-level costs is very reasonable. Going forward, I expect operating income to trend higher as the company’s various acquisitions are integrated and improved. This ignores any growth in the various end markets. Assuming 2020 EBIT of $10.5 million, my estimate of next year’s earnings and free cash flow looks like this.

At a share price of $20, Crawford United trades at 8.9x my estimate of 2020 earnings and at a normalized FCF yield of 11.8%. Total debt of just over $20 million is not quite 2x EBIT and leaves plenty of capacity if another acquisition opportunity comes along. Interest coverage as measured by EBIT/Interest expense is nearly 12x. Return on equity will exceed 40%, a figure that should be sustainable for years to come thanks to Air Enterprises’s spectacular success. I think a more reasonable yet still conservative value for Crawford United would be in the neighborhood of 12x my 2020 EBIT estimate. That would value the enterprise at $126 million and shares at $33 or so.

Crawford appears extremely cheap on an earnings and cash flow basis, with plenty of room to improve results. That’s the good. Now let’s take a look at the risks the company faces.

By far the largest downside risk to Crawford’s results is cyclicality. Air Enterprises is exposed to the building cycle. In a down economy where fewer large facilities are being built and major remodeling/expansion is postponed, results will suffer. Federal Hose is similarly exposed to the health of the industrial economy. CAD Enterprises is likely the least economically sensitive with the strongest secular growth trends in place, but will still rise and fall with the health of the aerospace industry. In short, this is not the type of company anyone should be paying 20+ times earnings to own unless we’re at the bottom of an economic trough. Revenues will fall from time to time, and the relatively high fixed costs common to most industrial businesses will take a bite out of profits. However, I believe Crawford’s businesses have yet to see their results peak this cycle. <9x earnings is far too cheap.

The other major factor to consider is management. Crawford is firmly under the control of insiders thanks to their majority ownership of both Class A and Class B shares. The company has a variety of related-party transactions to evaluate and consider. Insiders provided convertible loans to float the company through its toughest years and received large quantities of shares as a result.

Investors should also note that although the company’s recent acquisitions have been successful, Federal Hose was purchased from related parties and CAD Enterprises does business with related parties. I believe the prices paid for these businesses were attractive and the motivations behind the deals were sound, but transacting with related parties always invites the possibility that shareholder value will become a secondary consideration.

Transactions like these don’t particularly concern me as they have served shareholders well. Still, shareholders should remain wary of future related-party transactions. Management compensation is reasonable and I believe the board is motivated to increase the company’s value via their large ownership positions. Crawford’s future success depends on the whims of the company’s largest owners, so investors must be comfortable with their skills and motivations.

Alluvial Capital Management, LLC holds shares of Crawford United for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.