Overfunded Pensions Are Hidden Investment Gems

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Overfunded Pensions Are Hidden Investment Gems

Here’s something for the math geeks.

Recently I’ve come across a series of articles by David Trainer, CEO of New Constructs, an independent investment research firm in Brentwood, Tenn. Trainer’s writings focus on “economic earnings” rather than the more traditional accounting earnings.

Trainer uncovered 50 public companies in 2012 with overfunded pensions totaling $5.5 billion — a rarity these days. His argument was these assets shouldn’t be included in one’s return on invested capital calculation, thus producing a higher ROIC.

Trainer’s findings produce several companies that would make excellent investments. The least-known — Park-Ohio Holdings (PKOH) — is a hidden microcap gem that investors should get to know. Read on and I’ll explain why.

Overfunded Pensions Overfunded Pensions Are Hidden Investment Gems
Sources:
New Constructs, LLC and company filings

Background

Park-Ohio’s history dates back to 1907 when Park Drop Forge, a maker of closed-die forgings for crankshafts in trucks, was established in Cleveland. In 1920, Ohio Crankshaft got its start manufacturing crankshafts and camshafts for diesel engines. The two companies operated separately until merging in 1967.

Despite a volatile history, it prospered from the time of the merger until 1983 when the United Automobile Workers went out on strike for a record nine years. Today, the company is riding high, although it has undergone several difficult economic cycles in the interim.

But investing in a thinly traded microcap stock is a very risky decision, so it’s best to have all the details before you consider jumping in.

What’s To Like

As Trainer points out, PKOH’s pension was overfunded by $34 million as of the end of 2012, which is 5% of its total assets.  Given the company’s history with the UAW, it makes sense that it has taken this position. Lord knows it couldn’t survive another nine-year strike.

The other reason overfunding makes sense is that employees aren’t lending money to the company. In a second article about pensions, Trainer points out that AT&T (T) has an underfunded pension to the tune of $44.4 billion, which in essence is an interest-free loan made by employees.

Now back to its business.

Microcaps often have shareholders who own significant positions in the company. In Park-Ohio’s case CEO Edward Crawford owns 12.9% of its shares, and his son Matthew — the company’s COO — owns another 15.4% for a combined 28% of its outstanding stock. The only other shareholder that comes close to those numbers is Mario Gabelli’s firm, which owns 13% of PKOH shares.

Edward Crawford took control of PKOH in 1992 and has been running it ever since. With a 73-year-old CEO, you can expect the company to transition from father to son in the not-to-distant future. Generally, I like stocks that are family owned and operated as long as they respect the other shareholders. From where I sit, there don’t appear to be any red flags.

Park-Ohio both manufactures and sources industrial parts throughout North America. Its three segments — Supply Technologies, Assembly Components and Engineered Products — generated $595 million revenue in the first six months of 2013, a 4% gain over the year-ago period.

Its business is exceptionally slow at the moment due to some of its end markets suffering economically. As I said earlier, this is a business with ups and downs, but over the past 10 years, it has increased annual revenues by more than 10% on six occasions.


Article printed from InvestorPlace Media, http://investorplace.com/2013/08/overfunded-pensions-hidden-gems/.

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