KSW – Profitable Business Trading at Depression Levels

What do all value investors have in common? After they buy a stock, the price almost always goes down right away. I am definitely no exception. I often joke around that in order to make precise timing decisions, just buy my stocks two weeks after I do. But sometimes, stocks become so cheap that their prices simply do not make any sense. I believe that this is the case with KSW, Inc. The company furnishes and installs heating, ventilating, and air conditioning (HVAC) systems; and process piping systems for institutional, industrial, commercial, high-rise residential, and public works projects primarily in the state of New York. The price of this stock kept going down after I bought it. Refer to my analysis for more information about this company.

The main reason why KSW’s stock price keeps declining is because Floyd Warkol, Chairman and Chief Executive Officer, keeps selling shares of the company. Who wants to be on the other side of the trade? I do, because I know that he is almost done, and the stock just closed at $2.73 per share. The company has no debt and $2.42 per share of cash and marketable securities on the balance sheet. You might be thinking that the company must be losing money or something. But it is not. Not only is it profitable, it is the top HVAC contracting company in New York. Even Donald Trump used them and you know that Trump doesn’t just hire anybody.

Warkol was granted stock options in 1995 under the company’s employee stock option plan. If these options are not exercised, they will expire on December 31, 2010. The CEO started selling his shares at the end of March 2010. His continuous selling put downward pressure on the stock price and kept other investors from buying. Very few investors have the courage to buy the stock of a company when the CEO is selling. It doesn’t matter to them that he still owns 10 percent of the company and intends to hold shares for the long term.

As of July 16, 2010, he sold 89,100 shares out of 105,000 shares, which means that he only has 15,900 shares left to sell. He can easily be finished within a month. When he is done, guess what is likely to happen to the price of this stock? Buckle up and enjoy the ride.

Disclosure:
I, or persons whose accounts I manage, own shares of KSW, Inc at the time of this posting. This posting is not a solicitation to buy or sell securities. Neither Mariusz Skonieczny nor Classic Value Investors, LLC, is responsible for any losses resulting from purchasing shares of KSW, Inc. You are advised to consult your financial advisor or conduct the due diligence yourself.

11 Comments to KSW – Profitable Business Trading at Depression Levels

  1. gokou3's Gravatar gokou3
    July 22, 2010 at 5:42 am | Permalink

    Hi,

    Thanks for the article. I have followed the company for a while and notice the share sale by the CEO as well. You mentioned that the CEO is almost done with his option exercise/sale. My question is, how do you know that he won’t be selling his 10% stake in the company after he’s done with the option sales? Did he mention this in a CC, etc?

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      July 22, 2010 at 5:56 am | Permalink

      Thank you for your comment.

      “My question is, how do you know that he won’t be selling his 10% stake in the company after he’s done with the option sales?”

      I called the company and spoke with James Oliviero, General Counsel, and he told me that Floyd Warkol will be done selling after he is finished selling his 105,000 shares. I hope they keep their word.

  2. Mariusz Skonieczny's Gravatar Mariusz Skonieczny
    September 2, 2010 at 12:11 am | Permalink

    He didn’t say what the excess cash is. Read the following post for your other question.

    http://classicvalueinvestors.com/i/index.php/2010/03/22/so-what-is-this-enterprise-value/

  3. T Bruce's Gravatar T Bruce
    October 28, 2010 at 10:59 pm | Permalink

    Can you provide some insight into the option practice of KSW. Options are always confusing to me, but in general, more times than not, they seem like a way to inflate executive compensation at the expense of shareholders. In KSW’s case, Floyd Warkol is a serial recipient and seller of these options – adding to his already substantial salary (as a % of Market Cap). The excessive option granting (IMO) is a significant red flag about the interests of management. If he had high regard for his company and the ability to win and profitably complete work, why sell all the options. His stake would become bigger and bigger. I know “Not all your eggs in one basket” but the options seem excessive, especially considering his already hefty salary and other benefits (chauffeur, club dues, etc.)

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      October 31, 2010 at 5:55 pm | Permalink

      Based on my conversation with the management, he sold his shares because he didn’t want to pay taxes.

      The CEO’s compensation can definitely be argued as excessive however, you know what it is so you can make an educated guess on how much is left for shareholders. I am not too worried about his compensation because of how ridiculously cheap this company is. About 80 percent of market cap is in cash. If the stock doesn’t go up, then soon 100 percent of market cap will be in cash. In this case you are getting the business for free. It is like a free option on the actual business.

  4. T Bruce's Gravatar T Bruce
    November 1, 2010 at 3:37 pm | Permalink

    Thanks Mariusz! My concern is not just the most recent sale of options, but the sale of options in almost every year since 2005. I like the thesis of the investment, but it is difficult to have “full” faith when management is clearly lining their pockets through basic compensation and options. It seems to me that Floyd is most concerned about Floyd ($500K base pay, numerous options, chauffeur, club dues, etc.) not KSW, Inc.. It just feels like the company is an after thought. Afterall, it has been said that this type of business does not scale very well because it’s based on relationships, so entering into other markets is not likely to generate meaningful returns and the loss of Floyd (62 isn’t young) would/could severely hamper the company’s ability to win work in NY. So if I’m Floyd and the company’s future is bleak without me, then why not milk the cash for my estate (especially if I think this is MY company, so it’s MY cash).

    I do agree the business is almost like a free option, and if the construction industry turns around in the next 18-24 months then the stock would likely trade at multiples higher, I’m just not convinced that Floyd cares because he gets paid handsomely either way. Have you ever talked with Floyd to gauge what his passion is today? Is it the company, the job, the relationships, the money… Thanks again Mariusz.

    • Mariusz Skonieczny's Gravatar Mariusz Skonieczny
      November 2, 2010 at 6:06 am | Permalink

      Yes I spoke with Floyd on the phone. I also spoke with about 15 of his customers. It seems like he knows a lot about the business and makes sure that he would not take jobs unless they are profitable. Also the feedback from his customers was very positive. Even though I did my investigative research, it is hard to be 100 percent sure that he has our best interest in mind. He owns a lot of shares but unfortunately he keeps on selling his options like you said.

      I hope this helps.

  5. Mike Burruss's Gravatar Mike Burruss
    May 30, 2011 at 4:21 pm | Permalink

    Hey Mariusz
    Thanks to your analysis, I bought KSW last July for $2.90 per share. I know that you were excited about the recent news on Yukon regarding financing. I know that news was bigger than the news of the $36M project that KSW recently acquired, but I was surprised to not see you mention it at all. What are your thoughts on KSW? Still long? I bought in a taxable account in July, so am thinking I will hold for at least a year (which means less than 2 more months).

    Thanks

  6. May 30, 2011 at 10:48 pm | Permalink

    I sold KSW to buy something else so I am not really following it anymore.

  7. Mike Burruss's Gravatar Mike Burruss
    May 30, 2011 at 11:53 pm | Permalink

    Wow, thanks for that info. I assume you used the money to buy Yukon and Monument Mining… which leads me to a question for you. I read where you said that stocks under $1 are the most at risk of being delisted. Yukon and Monument both trade for under a buck…. so are you worried about them being delisted? And a follow up question/comment to that is, the market caps of Yukon and Monument are quite a bit larger than that of KSW. It would seem to me that the market cap, revenues and profits are more important than some arbitrary per share price in terms of being delisted…. no?

  8. May 31, 2011 at 8:09 am | Permalink

    I am not worried about that.

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