Company description
Alpha Pro Tech (APT, Financial) develops, manufacture, and markets building supply products. Its other segment is disposable protective attire (DPA). Technology, industrial and medical industries use its protective apparel garments such as coveralls, face masks, gloves and shields. Historically, the building supply segment accounted for 60% of total revenue - the remaining 40% is protective apparel. In addition, management noted many products develop through direct communication with end-users. This, coupled with FDA-approved facilities required to manufacture their products, creates a modest barrier to entry.
Alpha Pro Tech is an intelligent deep value investment in the tradition of Ben Graham. It has a $50 million market capitalization with an enterprise value of $36 million. Debt is only a small lease. Alpha Pro Tech offers a unique investment opportunity - a strong financial position supported by 10 years of free cash flow profits and selling below its net current asset value (NCAV).
I started an Alpha Pro Tech position, although an expected slowdown in the housing and protective garment industry may depress the stock price. But I will use market weakness to add to my existing position. Investors can expect a generous shareholder yield while holding the stock with a history of aggressive share repurchases. Management recently announced more funds committed to stock buybacks.
Note the sharp increase in sales during 2020 and 2021 and the reduction in 2022. The increased sales were from their Disposable Protective Apparel products. Now the effects of COVID-19 are normalizing. But government and company requirements may change. In addition to being a cheap BS and high earnings yield stock, the current valuation more than accounts for potential slowdowns. And to repeat, management offers shareholders a satisfactory return through consistent share repurchases.
The table below shows net income for the three- and nine-month periods ending Sept. 2022 as per the company's 10-Q. Note the year over year profit contribution decreased from the disposable protective apparel line. Most importantly, there's a $4.2 million unallocated overhead expense (C-suite) for the nine months ending Sept. 2022. The annualized unallocated expense of ~$5 million is saved if acquired by a larger competitor such as Lakeland Industries (LAKE, Financial). The considerable C-suite savings makes for an even more attractive acquisition candidate.
Opportunity/valuation
The table below highlights Alpha Pro Tech as an investable value anomaly from a discounted net assets and earnings perspective. Notice the significant increase in book value and retained earnings per share. These positive results compare even more favorably to the decline in enterprise value per share over the same multiyear periods. Book value per share increased 110.74% from Dec. 2018 to the most recent quarter. Retained earnings per share increased 129.75% over the same period. This contrasts with the enterprise value per share declining 69.72% from Dec. 2018 to the most recent quarter.
Net current assets trade at 75% of enterprise value. Additional value metrics are the low enterprise value to gross profit ratio, tangible book value, earnings before interest and taxes and revenue. These measures are at or near low historical and relative valuations.
Risks
The building supply segment (home repair and construction) faces a challenging macro environment with rising interest rates and a potential 2023 recession. Labor and material inflation is likely to impact margins.
Personal protective equipment (PPE) may see less demand and increased competition after Covid normalization.
Donna Millar, the deceased co-founder's wife, owns 10.26% of the shares, amounting to 1,284,603.
The company also has years of zero insider buying. CEO Lloyd Hoffman sold most of his shares during the 2020 irrational market price run-up from Covid, which increased demand for protective disposable clothing. Hoffman sold 1,251,574 shares at $31.65, or $39,608,120, in 2020.
A rising day sales outstanding is indicative of inventory buildup. The average days in inventory were 217 for the trailing 12 months compared to the historical average of 123 days.
There is excessive executive compensation for such a tiny company. Annual compensation for Hoffman was $1,632,000 in 2020 and $1,079,000 in 2021. The Senior Vice President of Manufacturing got $791,826 in 2020 and $626,382 in 2021, while the Chief Financial Officer got $505,250 in 2020 and $378,000 in 2021.
Conclusion
Alpha Pro Tech is an intelligent investment in the tradition of Ben Graham. It's cheap on historical free cash flow, earnings, break-up value, reproduction and sum of its parts valuations. Further, investors get paid to wait with a high historical shareholder yield from share repurchases and increasing book value.
Catalysts include the following:
- The company continues to create shareholder value with share buybacks.
- A stable high free cash flow yield over the prior 10 years with the expectation to continue.
- Double-digit increases in book value, retained earnings, Ebit and revenue per share versus a declining enterprise per value share.
- A revised government and corporation mask requirement is possible with new variants and diseases. In addition, N95 masks require a more complex FDA-approved process and specialized materials.
- Additional product international sales are likely by leveraging its investment in Indian manufacturers.
- A company sale to a larger entity is possible. Management has long-term multi-decade service so that senior management may be open to the company sale.
Disclosure: Long APT
