McCoy

Global (MCB.TO)
3/18/15
Stock Price $3.70

The current decline in crude oil prices has created what may end up being some of
the best buying opportunities in the market today. Oil prices tend to swing wildly to
the extremes, pulling oil service providers stock prices with them. One of my
holdings, and recent write-ups, Dawson Geophysical provides service to the firms
far upstream, hence its extremely volatile stock price. With an abundant of stock
prices beaten down due to the oil price pull back, I went looking for something a bit
more on the stable side in the oil services spectrum.

McCoy Global (MCB) is a Canadian based company that sells tubular handling, make-
up, and measurement equipment. McCoy has been on my list of stocks to research
for some time. I put off doing a deeper dive because on the surface all I saw was a
good company in a distressed industry selling for 10 to 12 times earnings, not very
exciting. However, as I dug deeper McCoy got more interesting. MCB has recently
divested a few noncore divisions and are now a pure play in the industry they
service. MCB is currently utilizing the capital raised from the divestitures to expand
international (recently opening three new locations), expand into rentals, and
develop two new products (weBUCK and weHOLD). MCB is less exposed to the
North American shale market than a lot of the oil services firms listed in the U.S. and
Canada and sells aftermarket products to help stabilize revenues (management
doesnt disclose, but says aftermarket is a good chunk of revenues). For reference,
during the 2009 oil price plunge MCBs total revenues plummeted 50%, however, a
large portion of the drop was from divisions that were recently sold. The current
business only pulled back 28% and remained profitable throughout.

Replacement Value

Analyzing MCBs balance sheet shows current market cap at about book value.
Typically Im interested in buying up companies that are selling below book value,
and getting their assets on the cheap. However McCoy is the type of company I also
enjoy investing in. They show consistent historical profitability, a clear path to
future growth, and, given they are selling at book value with a small amount given to
intangibles on the balance sheet, the market assigns little value to MCBs customer
relations, distribution, R&D, brand name, and product portfolio. I can purchase the
company significantly below what I believe replacement value to be. Making the
proper adjustment to intangibles I arrive at a replacement value right around $152
million, or $5.43 per fully diluted share, a good chunk above the current market
price of $3.70.



Earnings Power Value

McCoy has indicated that 2015 will be a tough year for their capital goods segment,
and I believe them. 2014 revenues came in at $120, if they have the same drastic
28% cut in revenues that they had in 2009, 2015s revenues would come in at
around $86 million. I view this as a worst-case scenario. Depending on the margins
they can sustain in this environment, I figure MCBs EPS between break-even and a
few cents. MCB has a rock solid balance sheet, with enough cash to cover all
liabilities. They can sustain breaking-even for however long this down cycle lasts.
Also important to note management has indicated that maintenance capex is
significantly lower than current depreciation. Meaning MCBs FCF/share would
likely be 5 to 10 cents higher than that of their EPS. Not a bad worst-case scenario.

McCoys most recent 12 months had $120 million in revenues, an almost 11%
operating margin, resulting in $0.33/share in earnings. Removing excess cash from
the market cap results in the below valuation multiples.



Normally I may not give much credit to excess cash on the books of a microcap
stock. Management may have no incentive or desire to create value with it.
However, McCoys management is providing a good-sized dividend to shareholders
and has indicated that they will be opportunistic with acquisitions if they can
acquire assets that fit their strategy as good prices. I see this excess cash creating
value in the not-so-far future.

The most recent twelve-months results show a good company trading at a decent
price. However, I dont think they show the true earnings power of MCBs current
assets. Historically MCB has earned almost 13% pre-tax ROA on its core business.
The previous 12-months ROA came in closer to 9.8%. This was largely the result of
excess G&A expense and the assets allocated to the new international service
centers that are not yet producing to their full capacity. Management has indicated
that it takes about 2 years for new centers to reach their potential, and all three are
on track to meet expectations. If I assume MCBs normalized earnings power is
roughly 13% pre-tax ROA, the result is an after-tax EPS of just over $0.40. Proofing
this out to make sure nothing looks out of line, assuming an 11% operating margin,
means MCB would have roughly $147 million in revenue. I think certainly doable in
a normalized environment considering the international expansion and new
products being introduced to market. Applying a 12.5 multiple, certainly realistic
for a growing company with no debt, gives me a value of $5.00/share for the current
operating business. Adding in $0.50 in excess cash (being conservative in the excess
cash assuming they may need to burn some if the oil slump is prolonged) gives me a
total value for the stock price of $5.50, pretty close to the replacement value of $5.43
found above. Under these normalized earnings assumptions the valuation ratios
come to an EV/EBIT of 4.77x and a P-ExCash/E of 7.12x.

Risks

Oil prices. McCoy Global will struggle if oil prices continue to lag. Perhaps
not to the extent of an E&P firm or my other major holding Dawson due to its
international exposure and consumable products.

Bad acquisitions. MCB has a boatload of cash and although I like its
management, there is the possibility that they will make an untimely
acquisition and chip away the rock solid balance sheet.

Conclusion

McCoy is a potentially less volatile play on oils current rout. The key to investing in
a down ridden cyclical industry is to find the players that will be around once the
industry rebounds and will be able to benefit from the weaker players going belly
up. McCoy seems to be one of these stronger players. They have enough cash to
cover all liabilities, an international and new product growth path, and a
management that seems cognizant of the current environment and the troubles and
opportunities that it presents. Although McCoys 2015 financial performance may
be (most likely will be) down, the value received for investing now when the clouds
are dark will be rewarded once oil prices rebound and the clouds part.