Will Benj’s investment in Magnetek be elevated or inverted?

Benj Gallander and Ben Stadelmann
Thursday, August 11, 2011

One company that appears mighty sweet from a contrarian perspective amid all the stock market gyrations is Magnetek, purchased by Benj in November 2010 at $1.30. It currently trades around $1.50.

This outfit, founded in 1984, bills itself as “America’s largest supplier of digital drive systems for industrial cranes and hoists.” In addition, it builds digital motion control systems for elevators, and is the world’s largest independent in this realm. As big as all this sounds, the enterprise will be fortunate to top $100 million in sales this year and turn a profit.

Before the recession hit, this outfit was a money maker. But then economic hardship took a bite out of revenues, dropping them from $100 million to about $80 million. That decline turned the profitability of better than $10 million in 2008 to a loss of more than $5 million in 2010. However, each of the last three quarters has been modestly in the black, with revenues around $25 million in each.

However, all of the problems have hurt the corporate cupboard. Cash has dropped to around $6 million from over $15 million in 2008. Cash flow has been consistently negative and is joined by a negative book value of about 50 cents. If goodwill is stripped out of the balance sheet, another buck or so would be subtracted from this paltry value.

Given all the bad, why did Benj throw money in this direction? Well, as usual, a primary focus was on debt, of which there is none. The stock traded over $10 for years, far above the the initial sell target of $5.74. Plus, in good times, this outfit should benefit, with both climbing revenues and a positive bottom line.

The company’s entry into the renewable energy field is also a positive, and growth here has been swift. In January it received better than $8 million in orders for its EForce Power Inverters. These inverters for wind turbines are likely to be a rapidly growing market, which will bode well for this outfit.

The company faces some major competitors. One of these is Manitowoc. This outfit has revenues north of $3 billion, but that is down about a third from before the recession. Profitability has been elusive for the most part.

Another major with sales that top $2 billion is Regal Beloit Corporation (RBC). However, where MTW and MAG have difficulty with the bottom line, RBC has remained profitable year after year.

Might one of these firms chase after MAG? One would think that they all know each other well, given their sectoral specialization. In addition, all are located in Wisconsin. Perhaps they can all gather at the Wisconsin Polka Hall of Fame and listen to the “Polish Girlfriend Polka” of the 2010 recipient of the Lifetime Achievement Award, Alvin Styczynski, before taking the Wisconsin cheddar tour and munching on the more than 600 types of cheese. While sealing the deal. We know, you thought that Wisconsin was just about the Green Bay Packers.

Magnatek seems well positioned to profit from an economic turnaround. While it is uncertain when this will happen, with a clean balance sheet, MAG should survive and potentially thrive when the economic cycle shifts into an uptrend.