Acme United's(ACU) business is as simple as it gets. They own brands that sell pencil sharpeners, hunting knives, first-aid kits, and lawn care tools. They are a micro cap company at $44M, so there is some liquidity risk in this company. If fundamentals go sour in a hurry, you may not be able to get out. Of course, being a long-term-oriented shareholder and doing your homework before you buy makes decisions to get out in a hurry far less frequent.
Over the last few years, they have purchased many of the brands listed above, and as a result, their operations have grown. The big news here is that they just bought a manufacturing and distribution facility from the liquidation of Roomstore, Inc for $2.8M. So what.
Well, read the press release Acme distributed:
Acme United Corporationtoday announced the purchase of a manufacturing and distribution center in Rocky Mount, North Carolina for $2.8 million. We anticipate an investment of approximately $500,000 to upgrade the buildings and equipment in the coming quarters, and about $300,000 in one-time, double running costs and moving expenses through year end. We expect to begin to generate savings in 2014."
Walter C. Johnsen, Chairman and CEO said, "The property is assessed for taxes at $5.9 million and has an estimated replacement cost of $13.5 million.
So, you're telling me a $44M company bought a $13.5M facility for $2.8M? This acquisition will allow the company to consolidate its manufacturing operations, and they estimate "savings" starting in 2014.
Even if this company was trading far above book value, that would be a material development. Let's take a glance at the balance sheet to get a better feel for how this fits in to their business.
With $33M in shareholder's equity in the most recent SEC filing, they can add the value of the land to that. (Note that they will record the land at cost and not at value, so shareholder's equity will not increase by $10.7M (13.5-2.8)) Let's say management is overly optimistic (which managements tend to be at the time of acquisition) and the land is only worth $8M. So add $5.2 to our shareholders equity in an effort to try and be conservative. We now have equity of 33+5.2=$38.2 shareholder's equity. Oh, I forgot something. The company just received a mortgage repayment in August for the building they sold in Connecticut. This payment was $1.75M and it wasn't on the most recent filing. So equity now equals an (almost) even $40M.
So, you're looking at a $44M with $40M in book value. Not bad. Now lets talk about the business.
The company has made numerous acquisitions over the past 3 years, and in the process has accumulated $26M on its $40M revolving credit facility. The rate they pay is reasonable at LIBOR + 175bps with a 2017 bullet maturity, and interest expense for the most recent year came out to $265K. With the decent cash flow they make currently, they should be able to cover the interest expense. My only worry long-term with them is whether they can continue to grow and make decent returns on equity in the 10-15% range, which is what they've done the last decade. Do they need acquisitions to do this, and if so, how many companies smaller than Acme are out there worth buying?
At the end of the day, I don't recommend to buy, but this is definitely on my watch list, and I recommend the same to you.