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Astro-Med: Razor and Razor Blade Business Model with Half of Sales Recurring

December 14, 2012 | About:
Astro-Med Inc. (ALOT) designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advance technologies in order to acquire, store, analyze and present data in multiple formats. ALOT also provides the related consumables and service necessary to support its products. Its target markets include products include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, life sciences, packaging and transportation.

ALOT operates its business through three operating segments: Astro-Med Test & Measurement, QuickLabel Systems and Grass Technologies. Products sold under the Astro-Med Test & Measurement segment acquire and record data and print the output onto charts or electronic media. Products sold under the QuickLabel Systems segment digitally print custom labels used in product packaging and automatic identification applications.Products sold under the Grass Technologies segment electronically capture and record neurological data that is used to analyze and diagnose disorders such as epilepsy and sleep apnea.

Guru and Insider AlertsJohn Rogers at Ariel Capital Management, currently holds 2.79% of ALOT's shares and purchased an additional amount of approximately 64,000 shares at an average price of $8.21 in the second quarter of fiscal year 2012. There have been no insider trades in the past twelve months.

Valuation

ALOT currently trades at a trailing 12 months P/E of 17.72 and a trailing 12 months EV/EBITDA of 6.64. In terms of asset-based valuations, its current 1.22x P/B is at parity to its five-year average P/B. ALOT achieved a 7.1% ROE for the past 12 months and a five-year average ROE of 5.9%.

ALOT P/E-ROE Comparison Chart1355466712719.png

ALOT has been profitable for nine consecutive years and is free cash flow positive for 8 out of the last 10 years. Free cash flow was negative in fiscal 2008 and 2011, due to a large capex cash outflow; operating cash flow was positive in these two years. Gross profit margins, EBITDA margins and net margins have been relatively consistent historically around 40%, 7% and 4%, respectively. ALOT usually spends about 7% of annual sales on R&D.

ALOT Earnings-Cash Flow Comparison Chart1355466862826.png

ALOT Profit Margins Analysis1355467007401.png

Financial Risks

ALOT is debt-free with net cash of $23 million representing 33% of its current market capitalization of $69.3 million.

ALOT Cash-Debt-Market Capitalization Comparison Chart1355467714096.png

Business Risks

ALOT does not face either significant customer concentration risk or supplier concentration risk. No single customer accounted for 10% or more of ALOT's net sales in fiscal years 2011 and 2012. ALOT has a broad range of customers, including Fortune 500 manufacturers and smaller firms engaged in the production and sale of apparel, avionics, chemicals, computer peripherals, communications devices, cosmetics, foods and beverages, pharmaceuticals and tires, as well as world-class hospitals and educational institutions. Raw materials required for the manufacture of ALOT's products are typically available from various suppliers, notwithstanding the fact that it obtains certain product components and finished products from single supplier sources.

Although ALOT has a well-diversified customer base, it is still heavily dependent on the conditions in customers' end markets. ALOT has indicated that some of its customers have been reluctant to make capital equipment purchases and are also limiting consumable product purchases to quantities necessary to satisfy immediate needs in fiscal 2011 and 2012, in light of poorteconomic conditions.

The markets for ALOT's products are characterized by rapidly changing technology and consequently short product life cycles. ALOT has to continuously innovate, as to provide high-quality, cost-effective products to meet customer demands.

Business Quality and Capital AllocationALOT employs a “razor and razor blade” business model in which its sales of hardware and software lead to recurring consumables sales. Consumables sales were 52% of fiscal 2011 sales. While I could not find 2012 data on consumables sales, I will assume the proportion of consumables sales to be similar for 2012.

ALOT has a strong foothold in its Test & Measurement segment, where its printers are chosen for nearly all of the cockpits and cabins of new commercial and military airplanes being built by Boeing and Airbus. Astro-Med Ruggedized printers are the only brand used in the Boeing 787 and Airbus A380 passenger aircraft, C-17 cargo aircraft, and the A400M and the C-130 military transport. It also claims to have in excess of $100 million in firm contracts covering the next 10 to 15 years for its Ruggedized products. As of Sept. 30, 2012, it has a total order backlog of $7.9 million, approximately four times its fiscal 2011 net profit.

ALOT has paid dividends in every single year since 1995 and currently sports a dividend yield of 3% with a dividend payout ratio of 66%. Dividends are paid quarterly. On Aug. 22, 2011, ALOT approved an increase in the number of shares authorized for repurchase from 254,089 to 500,000 shares of common stock.

ALOT Dividend Comparison Chart

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Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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