Thursday, February 21, 2013

Hidden Real Estate Value in Gencorp

Recently, Mario Gabelli, a famous investment manager, told CNBC about two stocks that he expects will double in value. One is Gencorp (NYSE: GY), the provider of aerospace and defense products. The other is Legg Mason, the global asset management company. In this article, I will take a closer look at Gencorp to see whether or not we should follow Mario Gabelli into this stock at its current price.
Huge Real Estate Asset
Gencorp operates two main business segments: aerospace and defense, and real estate.
In the aerospace and defense segment, Gencorp is the leading technology-based maker manufacturer of aerospace and defense products for the US government. The company believed that it was the only US supplier of all four propulsion types, including liquid, solid, air breathing and electric for both defense and space applications. The two biggest customers, Raytheon and Lockheed Martin, accounted for 36% and 28%, respectively, of the company's total revenue in 2011.
In the real estate segment, Gencorp owns 12,200 acres of land that were acquired in the early 1950's in Sacramento Metropolitan. Gencorp established Easton in 2009 in order to execute entitlement of 6,000 acres for new development opportunities. In addition, the company is leasing around 303,000 square feet of office space in Sacramento to different third parties, generating revenue of around $6.7 million in fiscal 2011.
The majority of Gencorp’s revenue, $909.7 million, or 99% of the total revenue, was generated from the aerospace and defense segment. The real estate segment only generated around $8.4 million in revenue in 2011.  
Real estate value is not reflected in the book yet
As of November 2012, Gencorp had a negative book value of -$393 million, $162 million in cash, and nearly $250 million in debt. The net property, plant, and equipment on its books was only worth $144 million. The land was valued only at $32.8 million, while the buildings and improvements was valued at nearly $140 million. As property, plant and equipment are recorded at cost, I personally think the book extremely undervalues the market value of Gencorp’s properties. Mario Gabelli liked Gencorp mainly for the company’s huge real estate asset in Sacramento.
Debt Financed Acquisition
In the middle of last year, the company agreed to buy Pratt & Whitney Rocketdyne, a rocket-engine maker, for $550 million from its rival United Technologies (NYSE: UTX).Gencorp is worth around $712.5 million on the market and it has only $162 million in cash. Thus, in order to pay for Rocketdyne, it has to incur much more debt. Recently, the company has confirmed that it would sell $460 million worth of its 7.125% second-priority senior secured notes, maturing in 2021, to finance this purchase. After the senior secure notes sale, its debt load would increase significantly, from $250 million to around $710 million.
Peer Comparison
Compared to its peers, including Alliant Techsystems (NYSE: ATK) and United Technologies, Gencorp had the lowest operating margin at 4%, while the operating margins of Alliant and United Technologies were 10% and 14%, respectively. However, Gencorp is the most expensively valued at 13.6 times EV/EBITDA. Alliant had the cheapest valuation among the three, at 5 times EV/EBITDA, whereas United Technologies is valued at 10.38 times EV multiples.

Operating margin (%)
Dividend yield
United Technologies is paying the highest dividend yield of 2.4%, while Alliant is paying a 1.6% dividend yield. Currently, Gencorp is not paying any dividend.
Foolish Bottom Line
I think Gencorp is an attractive real estate play with its 12,200 acres in the Sacramento metropolitan area. However, it would take some time for the company to fully unlock its potential real estate value. Personally, I think Gencorp could fit well in long-term portfolios of patient investors.

1 comment:

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