Guido Mieth
Company Description
Alpha Pro Tech (NYSE:APT) develops, manufactures, and markets building supply products. The other segment is disposable protective clothing. In the cleanroom, industrial, and medical industries, protective apparel garments, face masks, and shields are used to provide protection. Historically, the building supply segment was 60% of sales and 40% of protective apparel. Many products are developed through direct communication with end-users. Lastly, FDA-approved facilities are required to manufacture their products, creating 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. APT offers a unique investment opportunity – a strong financial position supported by 10 years of FCF profits and selling below its NCAV. I started a position. Although, a slowdown in the housing and protective garment industry may depress results. But I will use market weakness as an opportunity to buy. 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 increase in sales during 2020, 2021 and less in 2022. This was from their Disposable Protective Apparel products. 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 09/2022 as per the 10-Q. Note, the YOY profit contribution decreased from the Disposable Protective Apparel. A $4.2 million unallocated overhead expense (C-suite) for the nine months ending 09/2022. The expense of ~$5 million per year can be saved if absorbed by a larger entity. The large C-suite savings make for a more attractive acquisition candidate.
Company 10-Q
Opportunity/Valuation
The table below shows Alpha Pro Tech as an opportunity from a deep asset and discounted earnings perspective. Note the significant book value and retained earnings per share increase compared to the decline in enterprise value per share. BV per share increased 110.74% from 12/2018 to MRQ. RE per share increased 129.75% from 12/2018 to MRQ. This is in contrast to EV per share declining -69.72% from 12/2018 to MRQ. BV per share increased 148.34% from 12/2015 to MRQ. RE per share increased 356.45% from 12/2015 to MRQ. This is in contrast to EV per share declining -12.81% over the period.
Liquid NCAV trades at 75% of enterprise value. Another EV to GP, TB, EBIT, and revenue 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.
Lower margins from product material and labor inflation.
Personal protective equipment (PPE) may see less demand and increased competition after COVID.
Donna Millar, the deceased co-founder’s wife, owns 10.26% of the shares, amounting to 1,284,603.
Years of zero insider buying; CEO Lloyd Hoffman sold most of his shares during the 2020 run-up during the irrational market price reaction to COVID. The CEO sold 1,251,574 shares at $31.65, or $39,608,120, in 2020.
Inventory buildup is seen in a rising DSO from an average TTM Days inventory of 217 days versus the historical 123 days average.
Excessive C-suite compensation for a tiny company. Annual compensation, CEO Lloyd Hoffman 2020 = $1,632,000, 2021 = $1,079,000: Senior VP of Manufacturing = 2020 = $791,826, 2021 = $626,382, CFO = 2020 = $505,250; 2021 = $378,000
Conclusion
Alpha Pro Tech is an intelligent investment in the tradition of Ben Graham. It’s cheap on historical FCF earnings, break-up value, reproduction, or sum of the parts. Further, investors get paid to wait with a high shareholder yield from share repurchases and increasing BV.
Catalysts
The company continues to repurchase shares from its historically stable free cash flow.
There is a revised government and corporation mask requirement. N95 masks require a more complex FDA-approved process and materials. New product sales to international markets.
Company sale to a larger entity. Cooperative, long-term senior management is up for sale.
Disclosure: Long APT
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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