It might be time to take another look at Conrad Industries. This Louisiana shipbuilder has suffered through a string of bad years. Is there a recovery taking hold? Well….no. Thus far, 2019 looks just like 2018 and the company’s backlog has yet to show signs of a meaningful increase. But with its shares down 75%+ over the last five years, Conrad now trades below net working capital and at less than half of tangible book value. The company holds net cash equal to 40% of its market capitalization and is currently operating at just over break-even on a cash flow basis.
Conrad is one of a small number of US shipyards still in business. Conrad has operated on the Gulf Coast for several decades, building, repairing, and converting all manner of vessels in operation in US waters. The shipbuilding industry is very deeply cyclical and Conrad has always had its ups and downs. The most recent cycle peaked for Conrad in 2014. The company benefited from a wave of fleet renewals as vessels built in the 1980s reached the end of their lives and from strong demand by energy companies riding high oil prices. In the five years from 2010 through 2014, the company earned profits of more than twice its current market capitalization. In other words, when times are good they are very good. Then again, when lean times come Conrad can go years without generating a profit.
The company is well-aware of the nature of its industry and has stewarded shareholder capital well. During the high times, the company paid several special dividends and bought back quite a lot of stock. (However, the company showed discipline in avoiding repurchasing stock when shares were at record highs.) Management continued to invest in the business, including purchasing a neighboring parcel of land to expand operations, but avoided making major capital commitments just before the industry downtown set in. Conrad’s cautious approach and its strong cash position have allowed the company to weather the down years with relative ease.
Conrad has dealt with the downturn by attempting to pick up more repair work and by trying to break into the liquid natural gas bunkering barge industry. Repair work keep the company busy, but it carries low margins compared to building new ships. On the plus side, steady repair work at least keeps Conrad’s skilled labor force busy, well-trained, and ready for whenever demand picks up. Demand for liquid natural gas bunkering barges has been slow to develop, but the company is hopeful that demand will increase as more vessels are converted to burn natural gas instead of more polluting fuels.
As I sit at my desk in Pittsburgh, I am in no kind of position to predict where we are in the shipbuilding cycle for Gulf operations. Perhaps the next round of newbuild orders is about to arrive. Probably not given the state of the energy industry, but ships don’t last forever. I do think that at the current price around $10, shares of Conrad are fully backed by net working capital, plus another $11.50 per share in tangible book value comprised of property and equipment. Unless Conrad’s current doldrums continue for a decade or longer, it appears difficult to suffer meaningful impairment at the current valuation.
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