Sunday, June 04, 2006

Cascade Corp...Not the Dishwashing Detergent Company

Cascade Corp (CAE) will not get your dishes clean and shiny. But this relatively unknown company may shine in your portfolio.

Cascade, based in Fairview, Oregon, manufactures material handling "load engagement" products that are widely used on lift trucks. As per the 10-K: "Products are designed to handle loads with pallets and for specialized application loads without pallets. Examples of specialized products include devices specifically designed to handle loads such as appliances, carpet and paper rolls, baled materials, textiles, beverage containers, drums, canned goods, bricks, masonry blocks, lumber, plywood, and boxed, packaged and containerized products."

The company markets worldwide both to the end-use customer through the retail lift truck dealerships as well as to lift truck manufacturers. In emerging industrialized economies, lift trucks are repolacing manual labor and are viewed as productivity enhancements, consequently, softening the cyclicality of the business.

The company has leading market share in North America, and Europe, but holds significant share in Asia Pacific countries. It has had a strong presence in China for 20 years. The company has manufacturing facilities in the US and Canada as well as the Netherlands,Germany, England, Italy, France,Australia, Korea, and China.

Foreign sales are significant at Cascade representing $200 of $451 million in sales or 44%.The level of profitability of the European businesses has suffered due to price competition from several privately-owned companies in local and regional markets. The company, as a result of the integration of several acquisitions as well as new management is addressing European issues.

Operating margins vary widely across geographic segments. North America provides operating margins of 21.1% on some $250 million in sales last year. Europe essentially broke even on the operating line following an operating loss for 2005 on $132 million in sales. Gross margins run at half of North American levels. The Asia-Pacific geography provided a 10% operating margin on $45 million in sales last year. Finally China, with $22 million in sales operated at a company high 28% operating margin.

Cash flow from operations has exceeded net income for each of the last five years, totalling $224 million.Capex has totalled $53.5 million over this period. Ordinarily capex is slightly less than depreciation expense. The company has invested about $18 million in acqusitions in Europe in 2003 and 2004 (FY 2004 and 2005.) The company is planning to expand its Chinese expenditures over the next year and a half by $15 million. The company has generated free cash flow in each of the last eight years. Though the company has not engaged in significant share buybacks, the dividend growth rate has been 22% over the last five years. The fully diluted share count is 12.85 million versus 12.27 million five years ago up less than 1% per year. The current payout ratio is about 16% of TTM earnings.

Eight members of the senior management team have been with the firm for over 20 years. The CEO, CFO, and COO have been with the firm for over 33 years.

Despite the cyclicality of the business, net income has remained positive over the eight year period I analysed. Return on invested capital has reached a recent high of 15.5% compared to a median of 8.05% for the trailing eight years. The low for ROIC in the last eight years has been 5.5%. This sure doesn't seem to fit the profile of a cyclical name!

Balance sheet quality has improved markedly through the period. Long term debt to capital was 51% of capital eight years ago but is currently only 5%. Cash and marketable securities represent $58.5 million or 22% of equity compared to $30 million in long term debt.

I find the valuation compelling with EV/EBIT of only 7.1 times trailing twelve months EBIT. The stock is down 18% year to date.

Insiders own some 20.5% of the company (23.8% including stock options)

Disclaimer: Neither I, my family, nor my clients have a current position in Cascade.


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