Continental Materials Corporation (NYSEMKT:CUO) produces and sells heating, ventilation, air conditioning and construction products. The company also offers such services as heating, cooling evaporative cooling, concrete aggregate and construction supplies as well as security doors and PVC systems. The company has a current market capitalization of $28.5 million and an average daily volume of just under 1,000, so it is illiquid.
Continental Materials’ balance sheet
Moving on to the balance sheet. Based on numbers supplied with Continental Materials Corporation (NYSEMKT:CUO)’s last fiscal quarter results, the company had a current ratio of 3.3 and excluding inventories the company had a quick ratio of 2. What’s more, debt was low, the company only has a debt-to-equity ratio of 7% and a debt-to-assets ratio of 5%. Cash was only 5% of shareholder equity.
Still, the company has a book value per share of $31.9, which indicates at current prices, Continental is trading at a price-to-book ratio of 0.5.
Actually, if we strip down the balance sheet it becomes apparent that Continental Materials Corporation (NYSEMKT:CUO) offers deep value. Working capital is $30 million, and with a current market capitalization of $28.5 million, Continental is trading below the value of its working capital. In addition, Shareholder equity is $52 million and current assets minus total liabilities amount to $24.2 million, placing no value on the company’s $28 million in long-term assets.
Like most construction companies, Continental Materials Corporation (NYSEMKT:CUO) has had a tough past few years but there are now signs that the company is turning a corner. Fiscal 2012 was the first year that the company reported a full-year profit since the financial crisis, mainly due to a one-off gain of $9.5 million. However, excluding exceptional items, Continental is already in line for a better 2013 than 2012. In particular, the company reported a loss of $1.5 million for the first nine months of 2013, compared to a loss of $6.1 million for full-year 2012. Additionally, according to management, the fourth quarter is usually the company’s strongest.
Unfortunately, the company’s EBITDA margin is razor thin and the deduction of depreciation has, for the majority of the past five years, pushed the company into a loss. That said, the company’s free cash flow is nothing to be impressed by. Still, on a cash flow basis, Continental Materials Corporation (NYSEMKT:CUO) has held its own, reporting a positive net change in cash for two of the last four years.
Continental Materials’ outlook
According to the Continental Materials Corporation (NYSEMKT:CUO)’s management, things should start to improve during the next year or so. Levels of construction activity along the Southern Front Range of Colorado, Continental’s key demographic, are expected to rise from 2012 levels but not reach the levels seen during 2009.
All in all, Continental Materials Corporation (NYSEMKT:CUO)’s future is somewhat dependent upon the construction market, which is only just starting to return to normal levels. That said, the company looks financially stable and is free cash flow positive, so does not have to rely upon debt to support operations. Furthermore, with the company currently trading below the value of its working capital, Continental could be a deep value risk worth taking.