MiningManActually it does. Most of Emeco's PPE are yellow goods...

MiningMan

Actually it does. Most of Emeco's PPE are yellow goods produced by the likes of Caterpillar. There is a very active secondary market for these items as evidenced by Emeco's $24m in sales already this year.

In normal times these items sell for around book value (actually a slight premium). In bad times, like the peak of the GFC they still sold for more than 80% of book.

Also, it is the cash flow that matters not accounting profits. These items depreciate very quickly so Emeco won't replace large licks of these items while underutilised and combined with asset sales means the company's debt will rocket down (as it is already doing).

The reason for the massive discount is the concerns about debt and general aversion to the sector at the moment but I think you'll find most broking houses have valuations around the 35-40 cent mark in large part based on the asset value and or the DCF (which measures cash flows not accounting profits).

Basically there is a large correlation to the value of this company with its NTA. It is after all just an equipment hire company. In good times it trades above NTA and in bad below but it is the value of those items that sets the standard for the valuation.

Arguably, as with any cyclical company you should buy in bad times and sell in good. It is pretty easy to tell where it is at now.