Sales for the three months ended June 30, 2007 approximated $88,740,000 up from sales of $75,455,000 for the three months ended June 30, 2006. Net income for the three months ended June 30, 2007 was up over 55% at $10,178,000 or $1.02 per share versus $6,557,000 or $0.67 per share for the three months ended June 30, 2006. Based on the Company’s comments in the press release it seems as if these results should be expected to continue.
The outlook for earnings from operations continues to be strong with orders on hand increasing significantly during the first half of the year from the already unprecedented record levels at the end of 2006.
Ampco-Pittsburgh Corporation operates through two segments, Forged and Cast Rolls, and Air and Liquid Processing. The Forged and Cast Rolls segment produces forged hardened steel rolls used in cold rolling by producers of steel, aluminum, and other metals; and cast rolls for hot and cold strip mills, medium/heavy section mills, and plate mills. It supplies cast rolls to the metal working industry. The Air and Liquid Processing segment produces finned tube and plate finned heat exchange coils for the commercial and industrial construction, as well as for process and utility industries; custom air handling systems used in commercial, institutional, and industrial buildings; and a line of centrifugal pumps for the refrigeration, power generation, and marine defense industries.
The majority of the recent growth is from the Forged and Cast rolls division which supplies to the ultra-hot industries of steel, aluminum and other metal producers. The great thing here is they have a huge backlog, lots of earnings visibility and increasing margins. In fact, they have SOLD OUT their capacity through 2008! Here is some language from the Company’s most recent 10Q.
The Forged and Cast Rolls segment continues to benefit from the increased level of steel and aluminum production, particularly in China, and unprecedented demand for its products resulting from the worldwide shortage of roll capacity. Purchase orders have been received or long-term agreements entered into with numerous customers for the supply of forged and cast rolls for delivery through the end of 2010. The segment has virtually sold out its capacity to the end of 2008 and beyond that date for certain products. In large part, selling prices have been protected from volatility in the cost of materials by means of a variable surcharge. Emphasis for this segment will be to maximize capacity and the most favorable product mix while maintaining the reliability of equipment, superior quality and on-time delivery. The outlook for the foreseeable future is good with improved sales and income from operations expected in 2007. Current backlog (unfilled purchase orders on hand) and demand provide confidence that these operations, particularly Union Electric Steel, will operate at capacity for the next few years.
Below are some interesting investment considerations:
Backlog approximated $655,771,000 and $351,802,000 at March 31, 2007 and 2006, respectively, and $589,824,000 at December 31, 2006. The increase is principally attributable to the Forged and Cast Rolls segment. The March 31, 2007 backlog includes approximately $431,272,000 of orders scheduled for shipment after December 31, 2007 (with $205,880,000 of this amount scheduled for shipment after December 31, 2008).
The balance sheet is very solid here. As of March 31, 2007 the Company had $56 million in cash against only $13 million in debt. That is about $5 a share in net cash on the balance sheet that could be used for share buybacks, an increased dividend or accretive acquisitions.
World-wide demand coupled with a shortage of forged roll production capacity continued to bolster sales for 2006 and 2007 and operating income improved on the additional volume and higher margins.
AP is an international play as more than half of its sales are to non-US customers.
My final thoughts
A very interesting thing about this stock is it has about a 2 million share float because most of the stock is held by insiders. It is very rare to find a $500 million plus market cap company with such a small float. However, the few that I can remember (like Terra Nitrogen (TNH)) have had huge momentum runs after reporting great numbers and getting on investor’s radars (currently the stock isn’t covered by any analysts).
Finally, my thoughts on valuation. I think the Company will probably make over $4 a share in EPS this year easily. Due to the huge demand, great earnings visibility and strong balance sheet I think a 20 PE is appropriate for this company. That would put my stock price target at $80 a share. However, with this microfloat of 2 million shares, if momentum takes hold $100 could enter the picture. Regardless of how you look at this company it is undervalued.
AP 1-yr chart
Disclosure: Author has a long position in AP