Goodfellow Inc.

Goodfellow (TSX:GDL) bills itself as "The Wood Specialists" and claims to be "one of Eastern Canada's largest independent remanufacturers and distributors of lumber products and hardwood flooring products." The company is based in Delson, QC,with regional offices and distribution centres across Canada.

When we calculate CFBIT (Cashflow Before Interest and Taxes) for Goodfellow over the past 5 years, we first look at the average cashflow from operations, which has been $16.8 million. To this we add the taxes reported on the income statement, which averaged $7.5 million, as well as the net interest reported on the income statement. Unfortunately the income statement for Goodfellow does not report interest expense directly, but rather has a line item labeled "financial" which we'll use as a proxy, and it has averaged $2.3 million per year. Cashflow adjustments relating to income taxes add back another $0.7 million. From this we now deduct the capital expenditures, which averaged $2.5 million. So, over the past 5 years, Goodfellow Inc. generated an average of $24.8 million each year in free cash, before interest or taxes.

The shares last traded at $9.85 and there are 8.6 million shares outstanding, so market cap is $84.4 million. Debt on the most recent balance sheet (August 31, 2009) stands at $5.4 million, offset by $0.6 million in cash and short-term investments. So that gives us an enterprise value (EV) of $89.3 mllion. Dividing our EV by our average CFBIT gives us an earnings multiple of just 4.0. In other words, a historical return at current prices of a whopping 25% before taxes and interest. How many investments do you know that have that kind of yield?

Of course there are caveats. Revenue has fallen dramatically the past two years, from $518 million in fiscal 2007 to just $438 million in fiscal 2009. The outlook for the housing industry is cloudy. But it's these very uncertainties that create such an intriguing investment opportunity.