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No. of Recommendations: 10
Background:
Conrad is a ship construction, conversion, and repair company in Louisiana. From their annual report: https://backend.otcmarkets.com/otcapi/company/financial-repo... (Q1 report is here: https://backend.otcmarkets.com/otcapi/company/financial-repo...)

"Our product offerings in vessel construction have changed over time to meet market demands and currently include large and small deck barges, single and double hull tank barges, lift boats, ferries, push boats, offshore tug boats and offshore support vessels including aluminum crew boats. Our repair work involves maintenance and repair of existing vessels, which is often required as a result of periodic inspections required by the U.S. Coast Guard, the American Bureau of Shipping and other regulatory agencies. Our conversion projects primarily consist of lengthening the midbodies of vessels, modifying vessels to permit their use for a different type of activity and other modifications to increase the capacity or functionality of a vessel. Our aluminum new construction and repair/conversion business is not considered a separate operating segment but rather a part of our vessel construction and repair and conversion products and services. Our Conrad Amelia yard has been specifically designed to handle aluminum work; however, we can also perform steel new construction and repair at the yard and have also performed aluminum work at other of our yards."

Conrad is listed over the counter, but is fully reporting in financials (not via SEC, but directly posting on OTC Market's website as above).

Narrative:
Conrad started to struggle in a service role to a cyclical industry when the oil market bottom fell out. They are a cyclical company, and they struggled through the '08-'09 crisis, but rallied hard into 2014, and now are struggling again. However, "struggle" is a relative term. Conrad is well capitalized, wisely managed. Founding family controls it and own >40% of the stock. Conrad management also has a strong history of buying back shares wisely, and allocating capital judiciously during downturns and making smart acquisitions.

1+ year ago, Conrad refinanced some loans at a very favorable rate. They have continued buying back shares. They have expanded their business over the last 10 years, and recently have put a lot of spending into R&D to develop a new LNG barge business which they are optimistic about even though it's been slow going... they recently completed and delivered their first one of these which clears a big overhang on the stock (IMO).

Their Free Cash Flow has turned upward dramatically as they have reached key customer milestones. Their TTM FCF has moved from +$5m to -$40m to +$25m+ within the last several years - again cyclical.

Shares outstanding is ~5m now, and declining, stock is at $18.75 (~$95m market cap).

Metrics:
Book value = ~$23 / share
Net Cash = ~$4.5 / share
5 year average net income = $2 / year (but this has gone from $4.80 / share to slightly negative. Trailing income is now positive again) and was $1.06 / share for the first 6 months out of the year.

Catalysts:
No immediate catalysts, but they are buying back shares cheap, their backlog is perking back up. Even if not as profitable as 2013 business, I think it's quite attractive. Their book value to me is a conservative floor on value. The company is very conservative and expenses a lot of things that could be capitalized and added to the balance sheet.

Also, they won a $7.5m award for BP oil spill litigation which is non-trivial for them given the size of their business (stock did not react).

I think it's also possible you see them do a smart acquisition, but toward the end of the year, I think the market will view their new LNG business as an opportunity vs. a risk as they move to production... and I think LNG is a growth area generally.

Bottom line, good upside potential if things go right (solid business over time, maybe $35-40 fair value if all things are working well), but limited downside given over capitalized balance sheet with cash, and good management with a large insider stake.

Not a huge position for me, but decent sized. I'm not totally comfortable with the business being average or actually good, but I think management is sharp and the accounting is conservative which I like. I think stock is cheap for many of the obvious reasons and also it's illiquid and under-followed generally.

Ben - Long
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