Gencor $GENC

Asymmetric opportunity bolstered by net tangible assets

As of the time of writing this, Gencor Industries, Inc (GENC) trades below $12 per share, with a market cap under $175 million. At this price, I believe downside risk is highly protected by the company’s cash, inventory, land, and buildings. The value that this market price is attributing to the actual business, after considering the large net cash position, is quite low. I believe this opportunity exists due to forced selling that came about as a result of Gencor’s recent auditor and SEC filing difficulties. I will discuss these issues more later on.

On 04/03/2025, Gencor announced $144 million in cash and marketable securities, with no short-term or long-term debt, and quarterly revenue of $31 million. With a current market cap of under $175 million, this leaves the enterprise value around $30 million. (In fact, on 04/08, Gencor closed under $11 per share, with a market cap near $160 million and an enterprise value of just $16 million! This makes the situation even more attractive, but I’ll stick with the previous numbers to be conservative.)

I believe $30 million is an attractive enterprise value for Gencor which is supported by the balance sheet as well as Gencor’s earnings power. Let’s put some numbers on each one of those points. As of Gencor’s most recent filed 10-Q, which reported the balance sheet as of 06/31/2024, the company had $63 million of inventories and $12 million of property and equipment, with just $7 million of total liabilities. In my mind it is fair to say that Gencor currently trades at a discount to tangible book value, with the caveat that those numbers are growing more stale and inventory, for example, could be lower now than it was at that reporting date. That said, the more recently (03/31/2025) updated cash and marketable securities figures add to my confidence that Gencor’s business has not undergone dramatic change in the past nine months. Overall, suffice it to say that I think Gencor has at least $200 million of net tangible assets, most of which are cash and cash equivalents, compared to a market cap of under $175 million these days.

Regarding earning power, I believe Gencor has a normalized earning power of at least $4 million annually. An enterprise value of $30 million (or less) seems undemanding to me for a business that, while cyclical, is profitable on a normalized basis and strikes me as a fairly durable business. So, what does Gencor do? Let’s go back to my first learning about this company, which happened back in 2019.

Eric Cinnamond is one of my investing heroes. His approach has always resonated with me logically, and I especially admire his ability to make a compelling case for companies which are undervalued relative to both tangible asset value and earnings power. I eagerly read each of the new quarterly letters from Eric’s Palm Valley Capital Fund. After reading my previous description of Gencor, it should come as no surprise that I became familiar with this company because of Eric Cinnamond.

Eric described Gencor on at least a couple podcast appearances around 2019. Here is one of them:

It’s amazing how time flies and it feels like just yesterday that I was listening to this for the first time. Despite now being five years old, this episode is timeless, if you ask me.

As I learned in this podcast and others like it, Gencor is a leading manufacturer of equipment that is used in asphalt plants, as well as other highway construction equipment, particularly in North America. The company is open about its business being cyclical, seasonal, and heavily subject to fluctuations depending on how much federal and state funding there is at a given time for road construction and repair projects.

In my mind, Gencor’s leading position in the asphalt equipment industry makes it likely to be a durable business. Paved roads are the most important surface that we travel on in this country - we will use cars and trucks for transportation for a long, long time from now. The roads and highways we drive on need to be continually built, repaired, and replaced. Although federal funding for construction projects may ebb and flow, and companies which buy Gencor’s equipment may purchase those products in a cyclical, lumpy way, I believe Gencor’s products will be needed for a very long time. Gencor considers itself a leader in manufacturing this equipment, partly because of its advanced technical expertise that has come about from its long history manufacturing equipment for this industry.

As a result, I think we have here a company with a long history in its industry, and what I believe is probably a long future in this industry. Results are likely to be lumpy due to the cyclicality. But when I take an average of operating earnings over the years from FY2009 through FY2023, I get an average a little over $4 million annually. Eric Cinnamond has come to a similar idea of normalized profitability, and he’s most definitely better at arriving at estimates of normalized free cash flow than I am.

It’s worth noting that I listened to Eric’s thoughts about Gencor as of several years ago - what has happened with the company between then and now? Mainly, I think it was business as usual. The last five years look reasonably strong in terms of financial results, the cash pile has continued to grow, and there was just one small acquisition in 2020. I won’t dig too much further into Gencor as a business here, since I believe it’s more worth spending time on recent events for the company.

So what happened recently that caused the stock to get cut in half in the span of 4 months? Let’s put together a timeline:

Late 2024: Normal business and Gencor shares trading in the low $20 range.

November 7, 2024: Filing by Gencor notifying that its accounting firm was changing. This was simply because its accounting firm, MSL, was acquired by another accounting firm, Forvis Mazars.

December 17, 2024: Filing by Gencor notifying that it would be unable to file its 10-K for 2024 on time. Gencor referenced the previously mentioned change in accounting firm. Gencor also mentioned that in working with the new accounting firm, “material weaknesses exist in the Company’s internal control over financial reporting” and since this piece seems to be the key negative news, I will copy it directly so that anyone reading this can read it exactly:

“In addition, although the assessment of internal controls over financial reporting is not yet completed, management has concluded, in consultation with Forvis Mazars, that material weaknesses exist in the Company’s internal control over financial reporting related to (i) information technology general controls, (ii) controls over key third-party service provider System and Organizational reports, (iii) controls over the period-end close process, and (iv) the monitoring of the Company’s internal control framework. As a result of the material weaknesses, the Company’s disclosure controls and procedures and internal control over financial reporting were ineffective as of September 30, 2024.”

January 10, 2025: The expected notice from Gencor that it had received notice from the NYSE that it would be delisted if it didn’t regain current filings with the SEC.

February 2, 2025: Filing by Gencor notifying that it would be unable to file its FY2025 first quarter form 10-Q on time.

February 20, 2025: Notice by Gencor that it had dismissed Forvis Mazars as its accountant and appointed a new accounting firm, Berkowitz Pollack Brant Advisors.

Gencor shares sold off the most dramatically after the mid-December filing of its inability to file a timely 10-K, which included the above “material weaknesses” disclosure. Since then, Gencor has more or less been continually sold. As previously mentioned, it now trades in the $11 and $12 range.

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Now we know what the big issues - or perceived issues - are. Gencor is not current with its filings, and the company clearly didn’t work well with Forvis Mazars and switched to a new accounting firm. This is optically negative and likely caused some forced selling by some owners of Gencor shares. Depending on the company, becoming late to file quarterly SEC filings and then suddenly changing accountant could be anywhere from confidence-shaking to extremely suspicious. But I think Gencor is well-suited to work through this period of change and get back to normal. For me, Gencor’s balance sheet make it particularly robust to be able to handle difficulty like this without shattering my confidence as an investor in the company.

This is where I should re-iterate that everything here is my opinion, and not investment advice. Let’s be clear - these accounting issues could be serious issues themselves, or symptoms of larger problems at Gencor. That said, I think this is a situation where one needs to think about risk and reward. Gencor recently reported unaudited results of operations as of December 31, 2024 and its cash and marketable securities balance as of March 31, 2025. It reported $144 million of cash and marketable securities, and as far as I can see, sales as high as they’ve ever been. Is there an actual problem with the business? My guess would be no.

Instead, I think Gencor is as good a business as it ever was, and it encountered some exogenous difficulties that only involve its accounting. These have caused some investors to become forced sellers of Gencor. I imagine any ETFs, mutual funds, and the like would be required to sell Gencor upon that news. To me, it is actually comforting to know that there are probably forced, price-insensitive sellers of the stock, who are not analyzing the company and certainly not looking at the balance sheet while selling. I appreciate having a strong answer to the question: “why does this opportunity exist?”

Overall, my take is pretty simple. It’s pure guesswork, and I haven’t done any scuttlebutt, though I’d be interested to hear from anyone who has done that kind of work. Forvis Mazars acquired MSL and took over the accounting for Gencor. I assume Forvis Mazars is a bigger, more established accounting firm with more rules, compliance needs, etc. They come in and start looking at Gencor and say, “hey, we think you need to get up to our standards for these various internal controls and such” and generally cause a headache for Gencor at an inconvenient time. Gencor is run like a private, family-owned business. So, I can totally see this kind of thing happening where a new accountant comes in and says a bunch of rather pointless things are out of line. Gencor is probably thinking those things are pointless but goes along with it for some time and eventually gets frustrated to the point of changing accountant entirely.

Again, this is purely my thinking on what happened behind the scenes. But you can go back and read the quote regarding the supposed “material weaknesses” and to me (not an accountant or any kind of professional) it just sounds like some little bits of nonsense where Forvis Mazars would love it if someone at Gencor would sit there and basically monitor stuff, check some boxes, and sign off at the end of the quarter that all the verifications and monitoring was done. It all sounds somewhat trivial to the actual operations of the business to me. It would be a very different story if the notice said “we previously reported $100 million in cash and we actually only have $50 million” or “we’re going to need to restate a whole bunch of results from operations” or something of that nature.

In the end, I keep coming back to the balance sheet. Gencor’s market cap as I write this is under $170 million. Gencor has $145 million in cash and marketable securities, owned land and buildings, and tens of millions of dollars of inventory. It trades well below net tangible asset value, and some assets, such as its property in Orlando, may be worth more than what is stated on the balance sheet. Gencor is a business that I believe will be around for a long time, and despite being subject to cyclical conditions, is positioned for durability in an un-sexy market that is unlikely to change quickly.

I have found that some of my most preferred common stock investments are those where the downside seems very well-protected by tangible assets, while the company is still profitable on a normalized basis and has the possibility of being re-assessed by the market to trade based on earnings power rather than asset value. I believe this is a situation which falls squarely into that basket. As a result, I think this is a compelling opportunity with a favorably asymmetric risk/reward profile. Thank you for reading.

Disclaimer: This is not investing advice. Everything written here is my opinion and is for informational purposes only. You should do your own research and consult a financial advisor before making any investment decisions. I own shares of GENC.