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Overfunded Pensions Are Hidden Investment Gems

Good investments can be found in all sorts of interesting places

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Park-Ohio’s bottom line has suffered as a result of weak revenue growth so far this year. In the first six months, operating income grew a meager 1.9% to $47.4 million. On a positive note, its gross margin in the first half increased by 20 basis points to 18.5%. (Hooray for small miracles.)

Of its three segments, only its assembly components business was able to increase operating profits in the first half, delivering a 112% increase year-over-year to $17.6 million. It earned the same amount of money as its supply business on 17% less revenue. The silver lining in all of this: Park-Ohio’s got a truly diversified business in terms of revenue and earnings.

Why Care?

This is an exceptionally boring business; however, boring is good when it comes to investing. PKOH stock has traded in a very tight range around $20 the last three years until it started moving this past March. Strong fourth-quarter results pushed its stock up 90% in the span of two months. Although I’m not a technical analyst, I can say with certainty that Park-Ohio began its impressive run after falling below both its 50-day and 200-day moving averages. With weakness expected for the next quarter or two, it’s very possible this same scenario will play out over the next few months.

Beside the technical aspects, there’s the simple reality that despite a weak business environment at the moment, it intends to deliver at least $3.65 in earnings per share in fiscal 2013. That’s a P/E of less than 10, much lower than the S&P 500’s 17 and its peers’ ratio of 21. In addition, PKOH expects to hit $2 billion in annual revenue by the end of 2017.

If it simply treads water from a margin standpoint over the next four years, Park-Ohio’s P/E will be in the low single digits. I just don’t see that happening given its tremendous move between March and May. A good report in the fourth quarter will most certainly prevent that from happening.

Bottom Line

Park-Ohio Holdings’ biggest drawback is the amount of debt on its books, which is slightly less than $400 million. Fortunately, it generates plenty of cash to cover the $26 million in annual interest. In addition, if it continues to make smart bolt-on acquisitions, its inflow of cash will grow far faster than its outflow because it requires a small amount of maintenance capital expenditures to keep the business running.

At the very least, you know it won’t have a pension crisis in the next few years like some businesses will.

Look — this isn’t a stock you throw in a drawer and forget about. Having said that, I see the markets being kind to Park-Ohio’s stock over the next five years … but not without some serious turbulence along the way. Caveat emptor.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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