(CUO) research, news, and more from GeoInvesting

Company description

Mon, 18 Jul 2016 15:24:03 GMT

Continental Materials Corporation operates within two industry groups: heating, ventilation and air conditioning (HVAC), and construction products. The Company operates through two segments in each of the two industry groups: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group, and the Concrete, Aggregates and Construction Supplies (CACS) segment and the Door segment in the Construction Products industry group. The Heating and Cooling segment primarily produces and sells gas-fired wall furnaces, console heaters and fan coils. The Evaporative Cooling segment produces and sells primarily evaporative coolers. The Door segment sells hollow metal doors, door frames and related hardware, wood doors, lavatory fixtures and electronic access and security systems. The Company makes sales to general and sub-contractors, government entities and individuals. Concrete, aggregates and construction supplies are also offered from various locations.

Research

Wed, 17 May 2017 17:09:25 GMT

Closing Out Remaining CUO Long Position

CUO ($24.90) - In our February 7, 2017 email we stated we would be looking to close out our long position in CUO. On April 4, 2017 when the company announced its Q4 2016 results, we stated we had a small long position remaining. We will now look to close out the remainder of our long position. Yesterday after the close, CUO reported Q1 2017results:

Sales of $34.1 million vs $34.2 million in the prior year
Loss per share of $0.25 vs EPS of $0.31 in the prior year

Commentary from the10-Q:

“Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in southern Colorado and the seasonal sales of the Evaporative Cooling segment. Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment. As expected, the Company reported an operating loss for the first quarter of 2017. For the first quarter of 2016 the Company reported an operating profit primarily due to the CACS segment which benefited from favorable weather and substantially higher fan coil sales.”

CUO does typically reports a loss in its Q1 and that Q1 2016 was an aberration, all of which was disclosed in the filing. The company expects 2017 sales to exceed those of 2016, but margins remain unknown. Performance in all segments is very sensitive to the economy.

We may take a look at the stock again if it gets hit hard. CUO is a good example of a stock trading at a low P/E but is not necessarily cheap if its operating performance has been outside the norm.

We first noted bullish commentary in CUO’s Q1 2016 10Q which prompted us to start tracking the company in July 2016. The stock was trading at $16.97 at the time of the Premium Member Alert and reached a high of $30.90.

Research

Tue, 04 Apr 2017 14:05:47 GMT

CUO ($23.50) announced Q4 and full year 2016 results (10-K released on March 31, 2017, press release yesterday during trading day)

Q4 Sales of $36.9 million vs $35.1 million in the prior year

Q4 EPS of $0.20 vs $0.42 in the prior year
As we stated in past updates, CUO typically offers little to no commentary in its press releases. Via the 10-K, the Company stated it expects sales in 2017 to exceed 2016 levels. As in the past, the possibility of volatility in its margins remains as a caveat. On February 7, 2017 we stated we were looking to close out all or a good portion of our CUO long position. At this time we have a small long position remaining.

Research

Wed, 16 Nov 2016 19:36:38 GMT

CUO ($22.50) reported Q3 2016 results:

$37.6 million vs $36.1 million in the prior year
EPS of $0.62 vs $0.34 in the prior year

The company offers little to no commentary in its press releases. The 10-Q filing will be the key to see if the company offers any industry/business outlook.

Research

Tue, 04 Oct 2016 15:38:53 GMT

CUO Information Arbitrage Opportunity

Yesterday via premium tweet we stated that investors may have been misinterpreting the $CUO litigation news. Shares fell 11% to close at $22.65. During the trading day, CUO announced a partial summary judgement on its litigation with Valco, Inc. We do expect volatility in CUO, but It is our belief that shares will eventually recover from the drop in price related to the misunderstood development. We added a few trading shares on this dip. See our full summary of the litigation news here. You can also see our full coverage of CUO here under the research heading.

Research

Mon, 03 Oct 2016 18:22:14 GMT

CUO Info Arbitrage Opportunity – News of Summary Judgment likely misinterpreted by the Market

CUO shares fall 11% to close at $22.65

Continental Materials Corporation (CUO) reported today the issuance of partial summary judgment on its year-spanning litigation with Valco Inc. The stock fell 11% in reaction to this news. This is another case of InformationArbitrage. We are betting that shares will eventually recover the drop in price related to this misunderstood development.

The suit sought, among other things, to rescind the Pueblo aggregate lease and to recover approximately $1,282,000 of royalty overpayments and $1,470,000 of royalties paid in excess of actual tons produced. The company’s press release states that

“The Partial Summary Judgment resolved many of the Company's claims in Valco's favor, but the Company's claim for the return of royalty overpayments made during the statutorily allowed period is still pending.”

There is still an aspect of the judgment that is unclear to us. It's important to note that it appears that the company is attempting to get out of a long term lease agreement with VALCO where it looks like it was paying a yearly fee ($400k) for use of Valco land. In a worse case scenario we see a situation where CUO would still be on the hook to pay around 400,000 dollars a year in royalty fees for the term of lease agreement. CUO stopped paying this fee in late 2014. If the company has to start paying royalty fees again, the annual hit to EPS works out to be around 20 cents per share. (this compares to EPS of over $1.00 that the company reported in Q2 2016, alone).

However, the company has been paying over a million dollars in legal fees annually to fight this battle, which works out to savings of about 50 cents a share once this issue is put to bed.

While we saw a notable negative reaction by the market on the announcement, we believe the market reacted too harshly. While it is true that the chances of recovering about $2.7 million in the litigation are shrinking, the future operations are not negatively impacted by the judgment.

In our opinion, net net, as long as the company continues to experieince the bullish trend that has been established over the last couple quarters, we are viewing the sharp pull back in CUO as a buying opportunity. We look forward to management offering more clarity on the impact of this development on their financials. We have reached out to management, urging them to offer more details when they issue Q3 results.

Research

Wed, 24 Aug 2016 12:12:31 GMT

Information Arbitrage (InfoArb) Alert

COU Gets Our Attention

We first noted bullish commentary in CUO’s Q1 2016 10-Q which prompted us to start tracking the company in July 2016. The stock was trading at $16.97 at the time of the Premium Member Alert and now trades over $24.00, a new 52 week high. We disclosed we were going long CUO on August 17, 2016.

We have been investing in the micro-cap universe for over 30 years. So we are very familiar with many microcap stocks as well as nano-cap stocks. We are aware that CUO’s business is exposed to cyclical headwinds.

The Company operates through two segments in each of the two industry groups: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group, and the Concrete, Aggregates and Construction Supplies (CACS) segment and the Door segment in the Construction Products industry group.

But we are also aware that the Company has a history of using its SEC filings to provide a great deal of color on its business outlook, more so than it offers in its press releases.

This was significant to me and my team since the corresponding earnings press release did not mirror the bullish commentary, resulting in what we viewed as an InfoArb opportunity. The Q1 press release did not expand upon the fact that near-term growth in sales and earnings could be in the cards, reversing a trend of choppy growth over the last several years. However, the company’s SEC filings did cover this information. Well, the CUO delivered an astounding EPS number of over $1.00 for its 2016 second quarter.

In our August 16, 2016 email to premium members we highlighted these strong Q2 results…

Sales of $42.7 million vs $34.8 million in the prior year
EPS of $1.08 vs $0.21 in the prior

… and stated we intended to take a small long position.

Shares currently trade at the following meager valuation multiples if we annualize the run rate of the first and second quarter of 2016.

P/E: 9.5
EV/S: 0.3
EV/EBITDA: 4.7

Q2 InfoArb Analysis

We ended up initiating a position. The stock ended up 11.1%, closing at $22.25 on the day it released its numbers. We are actually surprised that CUO did not trade higher on the heels of the company’s superb financial performance. We presume that investors know that CUO can be a “one trick pony.” And the Q2 press release was mostly mundane. But just as the scenario that was present in Q1 2016, the Q2 10-Q offers a lot of detail on the health of the Company’s served markets. It looks like CUO is benefiting from a common theme that is also positively impacting other cyclical stocks that we are tracking and own, all of which are benefitting from a gradual improvement in the U.S. economy. We have noticed that as the housing/construction markets have seemingly reached the midpoint of their correction from the 2008 recession, a broader number of related companies in this industry are starting to gain momentum.

The Q2 filing revealed that unit volumes and prices are increasing in some of the company’s segments. More importantly, the company’s Concrete, Aggregates and Construction Supplies Segment (50% of total revenue) had been facing challenges in two of its major served markets. The management commentary in the Q2 filing indicates that conditions have improved since the Q1 2016 filing.

Q1 2016 Commentary

The enhanced performance of the segment is attributable to a continuing improved construction market in the Colorado Springs area and, to a lesser extent, the Pueblo market combined with increased pricing in both markets.

Q2 2016 Commentary

The enhanced performance of the segment is attributable to sustained improvement in the construction market in the Colorado Springs area, an improving Pueblo market and increased pricing in both markets.

Finally, management provided an outlook section. Notice the

Subtle hints of positive momentum marked in bold in the Q1 and Q2 outlook.
The addition of the positive Q2 outlook commentary for the company’s door segment also marked in bold.

Q1:

Overall the Company expects consolidated sales in 2016 to exceed the 2015 level. Revenues in the CACS segment are dependent of the level of construction activity along the Front Range in Southern Colorado as well as the level of selling prices. Construction activity has exhibited modest and thus far sustained improvement during the past two years in the Colorado Springs market. Construction activity in the Pueblo market has not experienced a similar recovery although there was some improvement in the most recent quarter. Concrete pricing has improved as well, but the pricing on most bid jobs remains sharply competitive. Further improvements in the CACS segment operating results will depend on a sustained improvement in the Colorado Springs construction market, the recovery of the Pueblo markets and the ability to maintain or enhance ready-mix concrete prices especially in response to any increases in cement and/or fuel costs that may occur.

The Company’s HVAC Industry Group anticipates some increase in sales in 2016 largely due to higher fan coil sales as construction spending in the lodging industry improves. To date, fan coil sales have outpaced expected levels and appear to be sustainable for the near term. Some improvement in furnace sales levels is also anticipated resulting from the full-year effect of a couple of new customers added during 2015. Sales of furnaces, heaters and evaporative coolers are primarily for replacement purposes and therefore are not heavily reliant on new construction. Sales of these products are generally dependent on the overall strength of the economy, especially employment levels, and are heavily influenced by weather conditions, particularly during their respective selling seasons.

Q2:

Overall the Company expects consolidated sales in 2016 to exceed the 2015 level. Revenues in the CACS segment are dependent of the level of construction activity along the Front Range in Southern Colorado as well as the level of selling prices. Construction activity has exhibited modest and thus far sustained improvement during the past two years in the Colorado Springs market. Construction activity in the Pueblo market has not experienced a similar recovery although there has been some improvement in the current year. Concrete pricing has improved as well, but the pricing on most bid jobs remains sharply competitive. Further improvements in the CACS segment operating results will depend on a sustained improvement in the Colorado Springs and Pueblo construction markets and the ability to maintain or enhance ready-mix concrete prices especially in response to any increases in cement and/or fuel costs that may occur.

Sales in the Door segment are also, to a significant extent, reliant on new construction. Bidding activity remains strong. The sales backlog at July 2, 2016 is 29.1% above the backlog at July 4, 2015.

The Company’s HVAC Industry Group anticipates some increase in sales in 2016 largely due to higher fan coil sales as construction spending in the lodging industry improves. To date, fan coil sales have outpaced the prior year’s actual and current year expected levels and appear to be sustainable for the near term. Sales of furnaces, heaters and evaporative coolers are primarily for replacement purposes and therefore are not heavily reliant on new construction. Sales of these products are generally dependent on the overall strength of the economy, especially employment levels, and are heavily influenced by weather conditions, particularly during their respective selling seasons. In-season furnace sales later this year will be largely weather-dependent. July typically marks the end of the selling season for evaporative coolers

We do have to point out the “elephant in the room” caveat - the possibility of volatility in its margins, even at higher revenue levels.

For example, of the 22.5% increase in sales for the second quarter, $2.8 million (or 8%) came from one project completed in the quarter with higher than average gross margins. Also, weather conditions can impact some of the company’s business. Still, revenues were up 14.6%, absent of this project.

While there are caveats to the CUO story, there is enough intel in SEC filings to warrant a closer look. A call to management is on my schedule, but my point of contact is on vacation. My goal is to gain clarity on the margin picture and overall health of the business.

More Lessons To Be Learned

As you know, we are relentless SEC filing hounds. Reading them does not only gives you an edge in understanding a particular company’s growth opportunities, but is also gives you a glimpse into changes taking place in certain industries that may positively or negatively impact parallel stocks. For example, We ar currently looking at another microcap stock serving the HVAC industry that seems to be experiencing similar positive trends as CUO. There’s a chance that this stock may even fare better.

Note: Please be aware that COU is thinly traded stock with a tiny float, which may not fit your investment style or preference.

Research

Tue, 23 Aug 2016 15:34:46 GMT

Added to Our Long Position in CUO

On July 28, 2016 we released our reasons for tracking $CUO when the stock was trading at $16.97. On August 17, 2016 we disclosed our long position on the heels of strong Q2 2016 results, where the Company reported EPS of $1.08 vs $0.21 in the prior year. Analysis of the second quarter 2016 10-Q indicates that the Company’s business conditions are stable and improving. I prepared an updated note that summarizes our original SEC filings vs. press release information arbitrage opportunity with our new findings in the Q2 10Q analysis. Full updated research note to be released shortly.

Maj Soueidan, Co-founder GeoInvesting

Research

Thu, 18 Aug 2016 04:00:00 GMT

Initiated Starter Long Position In CUO

In yesterday’s email we highlighted $CUO ($22.11) strong Q2 results and stated we intended to take a small long position. We did initiate a position during the trading day yesterday. The stock ended the day up 11.1%. A call management is on our schedule to gain more color on the margin picture and overall business outlook. For example, of the 22.5% increase in sales for the quarter, $2.8 million (or 8%) came from one project that was completed. We intend to determine how much of the net income/(margins) can be attributed to this project.

Strong Q2 financial results :

Sales of $42.7 million vs $34.8 million in the prior year

EPS of $1.08 vs $0.21 in the prior

See our full summary of Q2 here.

Research

Wed, 17 Aug 2016 15:06:18 GMT

We Intend to Take Small Position in CUO Based on Strong Q2 Results

CUO ($19.90) - Recall that in our July 28 email, we noted that bullish commentary in CUO’s Q1 2016 10-Q prompted us to release our reasons for tracking the company. This was significant to us since the corresponding earnings press release did not mirror this commentary, resulting in what we viewed as an Info Arb opportunity. The Company has a history of using its SEC filings to provide much more color on its business outlook, more so than it offers in its press releases. See our reasons for tracking here.

Just as before, the Q2 10-Q offers a lot of detail on the health of the Company’s served markets. We are seeing that CUO is benefiting from a common theme that is also positively impacting other stocks that we are tracking and own like $BXC. We have noticed that as the housing construction has probably reached the midpoint of its correction from the 2008 recession, a broader number of related companies in this industry are starting to gain momentum. An important caveat to the CUO story is the possibility of volatility in its margins, even at higher revenue levels.

Q2 2016 results:

Sales of $42.7 million vs $34.8 million in the prior year
EPS of $1.08 vs $0.21 in the prior

Research

Thu, 28 Jul 2016 15:01:00 GMT

**Tracking CUO

CUO ($16.97) operates in four business segments that all rely heavily on the U.S. economy. Historically the Company has inconsistent and volatile quarterly revenue and EPS performances. There is also a significant amount of seasonality with the business.

“Sales of the Company’s HVAC products are seasonal except for fan coils. Sales of furnaces, heaters and evaporative coolers are sensitive to weather conditions particularly during their respective peak selling seasons. Fan coil sales are, to a significant extent, dependent on commercial construction, particularly of hotels. Revenues in the CACS segment are primarily dependent on the level of construction activity along the Southern Front Range in Colorado. Sales for the Door segment are not as seasonal nor are they much affected by weather conditions. Historically, the Company has experienced operating losses during the first quarter except when weather is mild and demand is strong along the Southern Front Range. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in southern Colorado and the seasonal sales of the Evaporative Cooling segment. Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment. However, the Company reported an operating profit in the first quarter of the current year primarily due to sustained improvement in the CACS segment combined with substantially higher fan coil sales.”

Past financials:

	2015	2014	2013	2012	2011	2010	2009	2008	2007	2006
Rev	$136.8	$131.8	$121.5	$113.2	$107.2	$114.2	$113.4	$157.8	$168.4	$158.7
EPS	$0.85	$0.12	-$0.52	-$2.68	-$1.87	-$0.18	-$0.50	-$0.03	-$0.35	$1.27

A few trends disclosed only in the SEC filings are worth pointing out. Thus, we think an information arbitrage opportunity may be present. Here are a few of our observations:

Since 2005, Q1 2016 has been the first time the company posted a first quarter profit. The above quote confirms the company usually loses money in the first quarter. Given this, we are intrigued that it reported a profit in the first quarter of 2016.
Management’s commentary in the Q1 SEC filing indicates that CUO may be on track for an unusually strong year. It appears that most of the company’s divisions have positive tailwinds.

“Overall the Company expects consolidated sales in 2016 to exceed the 2015 level. Revenues in the CACS segment are dependent of the level of construction activity along the Front Range in Southern Colorado as well as the level of selling prices. Construction activity has exhibited modest and thus far sustained improvement during the past two years in the Colorado Springs market. Construction activity in the Pueblo market has not experienced a similar recovery although there was some improvement in the most recent quarter. Concrete pricing has improved as well, but the pricing on most bid jobs remains sharply competitive. Further improvements in the CACS segment operating results will depend on a sustained improvement in the Colorado Springs construction market, the recovery of the Pueblo markets and the ability to maintain or enhance ready-mix concrete prices especially in response to any increases in cement and/or fuel costs that may occur.”

“The Company’s HVAC Industry Group anticipates some increase in sales in 2016 largely due to higher fan coil sales as construction spending in the lodging industry improves. To date, fan coil sales have outpaced expected levels and appear to be sustainable for the near term. Some improvement in furnace sales levels is also anticipated resulting from the full-year effect of a couple of new customers added during 2015. Sales of furnaces, heaters and evaporative coolers are primarily for replacement purposes and therefore are not heavily reliant on new construction. Sales of these products are generally dependent on the overall strength of the economy, especially employment levels, and are heavily influenced by weather conditions, particularly during their respective selling seasons.”

Shares are trading at a modest trailing P/E of around 13 and Ev/EBITDA of 5.5. There could potentially be significant upside to these multiples if the company is about to enter a temporary growth spurt. We will continue our due diligence and hopefully interview management.

Caveats:

Even though the company may experience strong revenue growth through the rest of the year, margins can be somewhat volatile, so we are not as confident with the Company’s ability to maintain strong year over year profitability in ensuing financial reports. We will attempt to secure an interview with management to get a better read on margins.

Reasons For Tracking

Thu, 28 Jul 2016 04:00:00 GMT

**Tracking CUO

“Sales of the Company’s HVAC products are seasonal except for fan coils. Sales of furnaces, heaters and evaporative coolers are sensitive to weather conditions particularly during their respective peak selling seasons. Fan coil sales are, to a significant extent, dependent on commercial construction, particularly of hotels. Revenues in the CACS segment are primarily dependent on the level of construction activity along the Southern Front Range in Colorado. Sales for the Door segment are not as seasonal nor are they much affected by weather conditions. Historically, the Company has experienced operating losses during the first quarter except when weather is mild and demand is strong along the Southern Front Range. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in southern Colorado and the seasonal sales of the Evaporative Cooling segment. Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment. However, the Company reported an operating profit in the first quarter of the current year primarily due to sustained improvement in the CACS segment combined with substantially higher fan coil sales.”

Past financials:

	2015	2014	2013	2012	2011	2010	2009	2008	2007	2006
Rev	$136.8	$131.8	$121.5	$113.2	$107.2	$114.2	$113.4	$157.8	$168.4	$158.7
EPS	$0.85	$0.12	-$0.52	-$2.68	-$1.87	-$0.18	-$0.50	-$0.03	-$0.35	$1.27

A few trends disclosed only in the SEC filings are worth pointing out. Thus, we think an information arbitrage opportunity may be present. Here are a few of our observations:

Since 2005, Q1 2016 has been the first time the company posted a first quarter profit. The above quote confirms the company usually loses money in the first quarter. Given this, we are intrigued that it reported a profit in the first quarter of 2016.
Management’s commentary in the Q1 SEC filing indicates that CUO may be on track for an unusually strong year. It appears that most of the company’s divisions have positive tailwinds.

“Overall the Company expects consolidated sales in 2016 to exceed the 2015 level. Revenues in the CACS segment are dependent of the level of construction activity along the Front Range in Southern Colorado as well as the level of selling prices. Construction activity has exhibited modest and thus far sustained improvement during the past two years in the Colorado Springs market. Construction activity in the Pueblo market has not experienced a similar recovery although there was some improvement in the most recent quarter. Concrete pricing has improved as well, but the pricing on most bid jobs remains sharply competitive. Further improvements in the CACS segment operating results will depend on a sustained improvement in the Colorado Springs construction market, the recovery of the Pueblo markets and the ability to maintain or enhance ready-mix concrete prices especially in response to any increases in cement and/or fuel costs that may occur.”

“The Company’s HVAC Industry Group anticipates some increase in sales in 2016 largely due to higher fan coil sales as construction spending in the lodging industry improves. To date, fan coil sales have outpaced expected levels and appear to be sustainable for the near term. Some improvement in furnace sales levels is also anticipated resulting from the full-year effect of a couple of new customers added during 2015. Sales of furnaces, heaters and evaporative coolers are primarily for replacement purposes and therefore are not heavily reliant on new construction. Sales of these products are generally dependent on the overall strength of the economy, especially employment levels, and are heavily influenced by weather conditions, particularly during their respective selling seasons.”

Caveats:

Even though the company may experience strong revenue growth through the rest of the year, margins can be somewhat volatile, so we are not as confident with the Company’s ability to maintain strong year over year profitability in ensuing financial reports. We will attempt to secure an interview with management to get a better read on margins.