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All of Ampco-Pittsburgh’s products are custom made. The company builds on orders and on custom specifications. This means they are not exposed to the risk of keeping inventory and it also means that from the order backlog one can get a pretty decent overview of its business at any given time.
Moat
The company holds a niche in this market. From the following margin table we see that it has satisfactory pricing power:
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Gross Profit | 49.33M | 47.62M | 38.49M | 33.04M | 52.02M | 79.90M | 103.03M | 114.42M | 96.41M | 97.36M |
| divided by | ||||||||||
| Revenue | 219.17M | 212.38M | 180.23M | 202.86M | 247.00M | 301.78M | 346.83M | 394.51M | 299.18M | 326.89M |
| Gross Margin | 22.51% | 22.42% | 21.36% | 16.29% | 21.06% | 26.48% | 29.70% | 29.00% | 32.22% | 29.78% |
Family owned
AP is very much a family business. Founder Louis Berkman (age 102) is chairman emeritus. The CEO, Robert Paul (age 73), is his son-in-law and has been on the company’s board for over 40 years. Two of his sons (Laurence and Stephen) are also on the board. The family owns 15.29% of the shares outstanding.
China connection
The major growth in the steel production over the past few years has come from China. AP has been working to cash in on the growth. The company has started a joint venture with the fifth-largest Chinese steel producer to begin producing rolls in China. The plant was started in 2007 and should start manufacturing this year.
Risks
A discussion of risks is necessary for such a small company.
- Asbestos litigation: There have been numerous claims of asbestos-related injuries against AP and its subsidies. So far, the insurance has covered a substantial part of the claims and the management does not see any liquidity problems in the next 10 years. But there is no guarantee that significant additional claims will not be made.
- Cyclical industry: This is an obvious risk. AP has significant liquidity at the moment to handle a few bad years though.
- Executive compensation: It seems out of line for such a small company. In 2010 the income of the company was $15 million and the executives got $4 million with Robert Paul getting $1.8 million!
Balance sheet
From the third-quarter report of 2011, we dig up the following figures:
| (in $ million) | 09.2011 | 12.2010 |
| Cash | 80.9 | 70 |
| Total current assets | 232.9 | 217.2 |
| Total assets | 531.9 | 526.9 |
| Current liabilities | 93,3 | 89.7 |
| Total liabilities | 318,6 | 330,1 |
| Equity | 213.2 | 196.7 |
The company has a very good balance sheet with manageable amount of debt.
Shareholder return
AP has been a consistent dividend payer. The dividend has increased from 4 to 72 cents per share. At the current price of $18 per share the yield is 4%. It has not missed any payment in the last decade and the payment has never gone down.
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Dividend Paid | 3.84M | 3.85M | 3.85M | 3.88M | 3.93M | 3.93M | 5.51M | 7.02M | 7.34M | 7.38M |
| divided by | ||||||||||
| Shares Outstanding | 9.61M | 9.63M | 9.64M | 9.71M | 9.82M | 9.97M | 10.11M | 10.18M | 10.20M | 10.29M |
| Dividend Paid Per Share | 0.40 | 0.40 | 0.40 | 0.40 | 0.4 | 0.4 | 0.55 | 0.69 | 0.72 | 0.72 |
| Price at Year End | 10.75 | 12.16 | 13.67 | 14.60 | 14.51 | 33.48 | 38.13 | 21.70 | 31.53 | 28.05 |
| Dividend Yield | 3.72% | 3.29% | 2.93% | 2.74% | 2.8% | 1.18% | 1.43% | 3.18% | 2.28% | 2.56% |
Management
In the last decade, the company had one down year in FCF. For such a small company AP is fabulously well managed.
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Free Cash Flow | 470K | 15.73M | -4.42M | 2.26M | 6.12M | 18.88M | 15.40M | 23.86M | 426K | 7.95M |
| RoIC | -0.53 | 1.47 | -1.44 | -1.51 | 10.1 | 10.8 | 22.13 | 7 | 15.78 | 7.68 |
I do not like the management compensation policy though. The executives as a group of four individuals made $3.9 million in salary, out of which $969,000 was in stock options (strike price $25.77). For such a small company $178 million in market cap and $10 million in net income (for 2010), $3.9 million of compensation for the management is a gross overpayment in my opinion. This is 39% of the net income reported by the company, which is quite high.
Valuation
Valuing such a small company is like trying to hit a moving target. But let us try our hand anyway. The TTM FCF is $24 million, which means that at the price of $18 per share the market expects a growth of -0.2%. The P/CF is 4.3 and P/S=0.5. It seems cheap on all these metrics.
Conclusion
AP is a company with solid balance sheet, greater than 17% insider holding with strong FCF. I am a buyer under $18. I am long on AP, and hold $800 worth of shares at an average price of $23.
About the author:
A PhD candidate in Theoretical Computer Science. I started investing in December 2009 and my first stock CreditSuisse (CS) has tanked to almost half its value. This nudged me to start learning about investing from the ground up. I am a long term value investor and am planning to generate sustainable amount of money from investment income by the time I am 40 years old.
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