Alpha Pro Tech: The 'Greater Fool' Theory Is Alive And Well

Mar. 16, 2020 7:01 AM ETAlpha Pro Tech, Ltd. (APT)38 Comments
Robert Honeywill profile picture
Robert Honeywill


  • On March 13, Alpha Pro Tech announced the company has booked over $24 million in orders for its proprietary N-95 Particulate respirator face mask and face shields.
  • This is already above the highest of any total incremental sales for previous viral outbreaks, including SARS, H1N1 and Ebola. APT expects continuing strong order inflow.
  • I utilize my proprietary 1View∞Scenarios Dashboard to demonstrate APT is not a long-term hold at current share price, or even much lower.
  • However, this stock is certain to be the downfall of many gullible investors, unaware they are being drawn into the trap of the "Greater Fool" theory.
  • This idea was discussed in more depth with members of my private investing community, Analysts Cnr | H2 SuperGrid. Get started today »

Alpha Pro Tech: Investment Thesis

Massive COVID-19 Related Infectious Control Product Demand Increase -

Due to COVID-19 related demand for its infection control face masks and shields, Alpha Pro Tech (NYSE:APT) could quite feasibly book incremental revenues averaging $50 million per year for 2020 and 2021 for just these products. To put this in perspective, APT's total Infection Control product sales have been running at ~$5 million per year over the past few years, and is its highest margin product. APT's total revenues for 2019, including infection control, were $46.7 million.

EPS Increase Effect On Forward P/E Ratio -

APT's EPS in 2020 and 2021 could easily increase 8 to 10 times over the $0.23 EPS for 2019. At the March 13, 2020 share price of $12.51, and based on a forward EPS in the range of $1.80 to $2.50 for 2020 and 2021, APT's forward P/E ratio is currently in a range of 5.0 to 7.0. On the surface, these appear to be very conservative P/E multiples for a company with such a high EPS growth rate. Many gullible investors are likely to be drawn in by this.

The Problem Is The EPS Increase Is Most Likely Of A Temporary Nature Only -

Other authors have pointed out the EPS increase will not last. It has been suggested to take the share price before the increase and add a cash amount per share based on dividing net incremental cash generated by outstanding shares. Although this is a step in the right direction, it still overstates the intrinsic value being attributed to the shares. There are also suggestions the additional cash generated could be used to buy back shares and this will massively reduce outstanding shares. I see many reader comments agreeing with these two propositions, and that is a concern. It is only by really understanding the mechanics, and the constraints, that a fair value assessment of the shares can be made based on any given increment in net income and net cash inflows.

Arriving At A Fair Value Range For APT Shares Based On Any Given Increment In Net Income And Net Cash Inflows -

I provide supporting detail below as follows -

  • A brief description of APT's business.
  • Financial impact on APT of previous viral outbreaks.
  • A review of more recent financial performance.
  • Projections of estimated financial performance for 2020 to 2024, without any COVID-19 impact.
  • APT: 1View∞Scenarios Dashboards 2020 to 2024, projecting rates of return under various scenarios as follows -
  1. Base case - no COVID-19 impact.
  2. A slightly more optimistic Base case - no COVID-19 impact.
  3. A case, at current share price, including assumptions for COVID-19 impact on APT.
  4. A similar case to 3, but based on buying at an APT share price level pre COVID-19, plus an amount equal to incremental net income per share.
  5. A similar case to 3, but based on buying at an APT share price level that will provide a rate of return of ~8% per year through end of 2024.

APT: Investment Thesis Conclusion -

APT shares are possibly fairly priced around $5 per share at present, for a buy and hold investor who is prepared to accept a return of ~8% per year through end of 2024, and who also believes APT will achieve sales of ~$100 million of infection control products over the next 2 years.

Anyone who pays more than ~$5.00 per share is likely either unwittingly paying too much, or is otherwise buying to sell at a higher price in accordance with the "Greater Fool" theory. Good luck to the winners and commiserations to the losers. Incidentally, the CEO of APT sold 456,667 shares on Feb. 28, 2020 at an average $34.29, so it is comforting to know the company certainly does not have a fool for a CEO (see here).

About Alpha Pro Tech

As per Alpha Pro Tech's FY2019 10-K filings, products are currently grouped into two business segments:

(1) the Building Supply segment, consisting of construction weatherization products, such as housewrap and synthetic roof underlayment as well as other woven material; and

(2) the Disposable Protective Apparel segment, consisting of disposable protective garments (including shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats), face masks and face shields.

For the financial information presented in this report, I have used the previous segmentation, which, up to and including FY 2018, reported face masks and face shields separately under Infection Control segment. I have done this to facilitate projections of the impact of increased sales of these items due to COVID-19 related demand. Figure 1 below is a snapshot of an ad on Amazon on Feb. 26, 2020.

Figure 1

The above ad appeared on on Feb. 26, 2020. Notice the flag in the ad about availability. This did not appear the week before, and the ad is no longer running.

Previous Viral Outbreaks - Financial Impact On APT

Table 1 below provides an analysis of the financial impact on APT of previous viral outbreaks.

Table 1 - APT Income Statement - Selected Years 2002 To 2015

Comments on Table 1 -

  • Duration - In all three of the viral outbreaks highlighted in Table 1, the impact was almost entirely limited to within one fiscal year. This is confirmed by management's comments in the 10-K filings.
  • The H1N1 virus had by far the greatest impact on sales and profits.
  • Incremental cost savings - The incremental cost of revenue (cost of production of goods sold) for Infection Control products (primarily masks plus shields) was in all cases less than 30% (as a percentage of incremental sales). The incremental cost of production of additional product is generally less than the average cost due to take up of idle capacity. However, the greater the volume of incremental sales the more likelihood for a need to bring more facilities on line, with associated additional costs. In the Ebola case, the incremental cost percentage of incremental sales (16.3%) is lowest of all 3 cases. This is likely due the relatively small additional production was able to be produced within the capacity of existing facilities. The higher incremental cost (29.3%) for the H1N1 period is likely due to additional costs being incurred, such as for additional facilities and overtime shifts.
  • Management bonuses - Previously, 2 management staff were entitled to 5% each of profits, with an upper limit of $1 million. Management bonuses are shown at foot of Table 1. Being precise in projecting future payments is difficult, as acceptance of the bonuses has involved some discretion in the past. There was for instance an election not to take bonuses in 2010, following the $1.54 million bonus payments in 2009. One of the recipients passed away in December 2017, and the FY 2019 10-K filing reports only one management staff currently receiving the 5% bonus. This raises a question of management succession planning.
  • SG&A - It is assumed the increases in SG&A in the years of viral outbreaks will include a 5% management bonus.

Hopefully, the income based historical review per Table 1 will assist in formulating assumptions related to the projected financial impact of COVID-19. (WHO has named the disease COVID-19, short for “coronavirus disease 2019" and has now declared it a pandemic). I also find it useful to review the impact on EPS, balance sheet and funds flows.

Table 2 - APT Balance Sheet By Year 2008 to 2015

I have chosen the period 2008 to 2015 because it covers both pre and post H1N1 and Ebola viral outbreaks.

Comments on Table 2 -

Working capital - As would be expected, an increase in working capital occurred with both the H1N1 and Ebola viral outbreaks, to service the higher production and sales. The picture is clouded for the H1N1 period because the new Building Supply segment was rapidly expanding, with a near doubling in sales in 2010 per Table 1 above. For the Ebola period, the picture is clear, with net working capital increasing by ~$4 million in 2010, before returning to pre-2010 levels by end of 2011. My 1View∞Scenarios Dashboard is able to model capability of APT to fund increases in working capital. But this is not a critical area as APT has no debt and significant cash reserves - funding of increased working capital associated with COVID-19 will not be an issue.

Cash - Notice in Table 2 the fluctuations in cash balances in the year of the viral outbreak and the following years. For H1N1, the highest cash balance was in 2010, the year of the outbreak. The following year in 2011 the cash balance went down significantly due to reduction (payment) of working capital liabilities incurred in 2010. Working capital assets (inventory) did not reduce and thus generate cash in 2011, due to the growing Building supply segment. For Ebola period, cash decreased in 2014, the year of the outbreak, due to increase in working capital in that year. Cash showed a sharp increase in 2015 as inventory returned to normal levels.

Share Repurchases - These also have an effect on cash balances. APT repurchased 1.55 million shares in 2009. Analysis reveals repurchases of 0.31 million shares at average $0.92 in Q1-09, 1.14 million shares in Q2-09 at average $1.33 and 0.11 million shares in Q3-09 at average $2.93. Repurchase activities then ceased, with nil share repurchases in 2010. Share repurchase activity only recommenced in 2011 when share prices returned to 2008 levels, pre-H1N1. This tells me APT management is unlikely to use cash generated in this COVID-19 virus period for share repurchases, while share prices are above intrinsic value.

APT: A Review Of More Recent Financial Performance

Table 3 APT - Income/Equity Review 2016 To 2019

Table 3 is in a form I often refer to as the "Equity Bucket". I review what is being poured into the "Equity Bucket" in the form of Net Income, Comprehensive Income items and share issues including staff exercise of options. I then review what is being poured out of the bucket in the form of dividends, share repurchases, and anything else that reduces shareholders' equity. What I am particularly looking for in my review is the extent to which shareholders actually derive benefit from distributions out of equity.

Comments on Table 3 -

APT Earnings Growth - Over the last three years, 2017 to 2019, total net income was $9.26 million, an average of $3.03 million per year. Net income for 2019 is $3.00 million which compares to 2016 net income $3.17 million. Despite EPS increasing by over 20% from $0.189 in 2016 to $0.228 for 2019, APT is not a growth story.

APT Share Repurchases - The growth in EPS that has occurred is by way of share repurchases reducing share count. A claim by management that share repurchases are a distribution to shareholders is only valid if share count reductions are actually achieved. Often, issues of shares to management substantially offset or eliminate the reductions from share repurchases. In the case of APT, share repurchases have been highly effective in substantially reducing share count. Also, prices paid for share repurchases have been below year-end share prices in three of the four years shown in Table 3. In their management of the "Equity Bucket," I would say management is definitely "Shareholder Friendly". Note from Table 3, the share repurchase amount, net of stock compensation, is fairly close to net income of $9.26 million over the past 3 years, effectively a close to 100 percent distribution of earnings.

Table 4 - APT Balance Sheet Review 2016 to 2019

Comments on Table 4 -

  • APT has a strong balance sheet funded entirely by equity - no borrowings.
  • Strong working capital surplus of $17.8 million, excluding cash.
  • In addition to Net Property Plant and Equipment of $3.9 million, APT has $4.8 million invested in a joint venture in India. The $4.8 million is recorded in investments. The joint venture manufactures product for APT's Building Supply segment.
  • Cash of $6.9 million, together with the above, make up the equity balance of $33.2 million.

APT: Projecting Financial Performance 2020 To 2024 - Without COVID-19 Virus Impact

My 1View∞Scenarios Dashboard links to financial projection modules similar in format to historical Tables 1 to 4 above. Tables 5.1, 5.2 and 5.3 below reflect base case assumptions for projecting APT financial performance over the next 5 years, 2020 to 2024, assuming no COVID-19.

Table 5.1 APT Base Case Income Statement Projections - 2020 to 2024

Table 5.1 projections of net income for 2020 to 2024 are mostly an extrapolation of financial data for 2019. Nil growth in revenues and operating income are assumed, based on lack of growth over the last few years.

Table 5.2 APT Base Case Income/Equity Summary Projections - 2020 to 2024

Table 5.2 summarizes what is projected for the distribution of the net income per Table 1. Comments follow -

  • Net income is flat, all of the EPS growth comes from share repurchases reducing share count as shown in the top section of Table 5.2.
  • Stock compensation included in equity represents non-cash amounts already charged against net income. This is an add back to net income for cash flow purposes. Shares issued on exercise of options are assumed to have an exercise price 50% of current share price, based on historical data.
  • Repurchase of common stock 2020 to 2024 - The assumed share numbers repurchased are multiplied by the average share price each year to arrive at dollar cost of share repurchases.
  • Share price at year-end is dynamically calculated by the 1View∞Scenarios Dashboard based on the current input assumptions.

Table 5.3 APT Base Case Balance Sheet Projections - 2020 to 2024

Table 5.3 shows the balance sheet projections which draw on data generated in Tables 5.1 and 5.2 plus some direct inputs. The direct inputs include items such as the equity investment in the Indian joint venture, working capital and plant and equipment. Historically, these items have shown either little or fairly regular change over time.

The foregoing Tables 5.1 to 5.3 reflect the base scenario estimates. From here onward, I will just present the 1View∞Scenarios Dashboard, which allows the viewer to see the changes in key items such as net income, EPS, share price, cash balance and shareholder total return, as changes in assumptions are entered.

APT: 1View∞Scenarios Dashboards 2020 to 2024

Table 6.1 A Snapshot Of APT Base Case

Comments On Table 6.1 -

  • Table 6.1 input assumptions (the cells colored blue) are the underlying assumptions adopted for calculating the projections in the APT base case financial statements. Tables 5.1, 5.2 and 5.3 above are a reflection of assumptions in Table 6.1.
  • The base case, of course, is unrealistic because it excludes the impact of COVID-19. But it is extremely useful for understanding the likely performance of APT once the impact of the virus has passed, and things come back to normal.
  • The base case assumes a constant P/E ratio of 15.0. Buying shares at a P/E ratio of 15.0 is indicative of an implied investment yield of 6.7% (inverse of 15.0). But that is dependent also on the EPS amount on which that P/E ratio is based remaining constant. The only way an investor can realize a return on a share investment is through receipt of dividends and/or share price gains. APT does not pay a dividend so shareholder gains can only come from share price gains. APT projected earnings (net income) are flat. But APT does some financial engineering by means of share repurchases to increase EPS despite flat earnings. But for the fact 2020 EPS growth is projected to be flat, the 2024 projected average yearly rate of return of 5.15% in Table 6.1 would approximate the implied yield of 6.7%.
  • One of the factors that affects the rate of return calculations, as compared to implied yield, is whether the net income generated is actually managed for the benefit of shareholders. For years, Apple (AAPL) hoarded cash resulting in a suppressed share price. A major reason the APT base case projection shows a rate of return around the implied yield is APT is assumed to distribute around 100% of net income (which closely equates to cash flows) to shareholders by way of share repurchases. Note that in Tables 5.3 and 6.1 above, cash at end in the years 2019 to 2024 is in a range between $6.5 and $7.0 million. This is because I have input assumptions for numbers of shares repurchased each year so as to end up with that result.

In case the base case is considered too pessimistic, I have also run another case with slightly more optimistic assumptions, also without COVID-19 impact.

Table 6.2 A Snapshot Of A slightly More Optimistic APT Base Case

Table 6.2 reflects changes in assumptions from Table 6.1 as follows -

  • Revenue growth for all 3 segments and for all years 2020 to 2024 is increased above nil% per year.
  • Total G&A is increased by $25,000 per year cumulative.
  • Share repurchase numbers are not adjusted. The cash balance does increase, but remains within the level of $6.5 to $7.0 million, as for Table 6.1.

The outcome for shareholder rate of return for holding to end of 2024 is an increase from 5.2% in base case to 9.0% per year in the more optimistic version of the base case.

In Table 6.3, I incorporate some selected COVID-19 assumptions into the Table 6.1 base case.

Table 6.3 A Snapshot Of A Case Including Assumptions for COVID-19 Impact On APT

Comments on Table 6.3 assumptions -

  • Infection Control sales increase due to COVID-19 - As per Table 1 above, increased sales due H1N1 virus were $14.3 million. I have assumed around seven (7) times, a $100 million increase, for COVID-19 impact through end of 2021. This amount is based on a press release issued by APT on Mar. 12, 2020 as follows:

"As of March 11, 2020, APT has booked approximately $22.6 million in orders for the company’s proprietary N-95 Particulate Respirator face mask since January 27, 2020, ...and demand for the product remains strong. As a result of a ramp up in production, the company maintains expectations to fulfill approximately $4.0 million of the currently booked orders in the first quarter of 2020, with the remaining $18.6 million in backlog of orders to be fulfilled by early in the third quarter of 2020. The company still expects the ramp up plan on N-95 face mask production to be completed by early May, which will enable the company to continue to fulfill current and expected future orders. In addition, orders of the company’s line of face shield products have also increased significantly since January 27, 2020, currently totaling over $1.6 million, with approximately $1.0 million of the orders being booked since the company’s February 27, 2020 press release, and demand remains strong. The $1.6 million in currently booked orders represents the approximate average annual sales for this product line over the last three years."

Table 6.3.1 below shows a projection of APT incremental infection control sales in FY 2020, based on the above press release.

Table 6.3.1

For FY 2021, I have assumed additional sales of $43 million will be made before conditions return to normal as vaccines become available and a degree of herd immunity develops.

  • Incremental cost of production - I have assumed 30% based on discussion in comments under Table 1 above.
  • G&A - I have assumed an additional $4.0 million in 2020 and $3.0 million in 2021 - see discussion under Table 1 above.
  • Working Capital - Additional inventory, receivables and payables are allowed for, but these merely affect timing of cash flows and there are no liquidity issues.
  • Share repurchases - Assume only sufficient share repurchases to offset employee issues in 2020 and 2021. Recommence share repurchases in 2022. In actual situation, I would expect a shrewd APT management to be opportunistic in timing share repurchases, based on share price levels at the time. This may limit opportunities for economic repurchases if share price remains above intrinsic value. APT may need to look for other avenues for deployment of a potentially large and idle cash balance.
  • Cash - Repurchase sufficient shares to reduce cash balance to $6.5 to $7.0 million range by end of 2024.
  • Share price target - Target set is ~$7.43 based on $3.43 per Table 6.2 plus incremental net income of ~$4 per share in 2020 and 2021 (Net income 2020 of $32.1 million plus 2021 $24.9 million per Table 6.3 minus $2.9 million in each of 2020 and 2021 per Table 6.1 = $51.2 million incremental net income, divided by 12.885 million shares outstanding).

Under the assumptions in Table 6.3, indicated rates of return are negative in all cases, based on buying APT shares at the current price of $12.51. I provide a similar scenario to Table 6.3, except for buying APT shares at a lower price of $7.44, as per Table 6.4 below (Table 6.4 is truncated, as assumptions, except those affecting share price, are unchanged from Table 6.3).

Table 6.4

Processing the assumptions through the 1View∞Scenarios model brings to light the fatal flaw in adding incremental earnings per share to the pre-COVID-19 share price to determine a share buy price. What you end up with is a zero rate of return. Table 6.5 below has the same assumptions as Table 6.4, excepting the share buy price assumption is lowered by 60% to $5 in order to deliver an 8.27%% per year rate of return through 2024.

Table 6.5

APT COVID-19 Impact - Discussion

Tables 6.1 and 6.2 indicate APT returns of ~5% to 9% were in the range of possibilities, before the COVID-19 outbreak. Table 6.3 projects estimated rates of return based on allowing for substantial incremental sales of infection control product. The projected rates of return are negative, based on buying at the current share price of $12.51. Table 6.5 shows at a lower share buy price of $5, and holding through to end of 2024, a yearly rate of return of 8.27% is indicated. The uncertainty of the impact of COVID-19 equates to increased risk, and increased risk requires higher potential rates of return. A target rate of return of 8.27% is likely inadequate in the circumstances. I could run any number of alternative scenarios to Table 6.5, but it would be unlikely I would come up with a target share price above $5.00 (more likely much lower). As the share price is currently $12.51, there is presently no opportunity to buy APT shares for a long-term hold. The share price may well go higher and stay higher for a considerable period, but buying on that basis requires a degree of speculation. Also, while the share price stays at elevated levels, that inhibits APT repurchasing shares at intrinsic value. In the absence of repurchases, there will be limited or no EPS growth beyond 2021, based on the flat earnings estimates for 2021 to 2024 per all Tables 6.1 to 6.3. That could leave APT sitting on a huge chunk of idle cash for a considerable period. APT might be better to pay a large one off dividend, or invest in other income producing assets if their own share price remains above intrinsic value.

This is quite an interesting case. If anyone would wish to see additional alternative scenarios run, this could be arranged.

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This article was written by

Robert Honeywill profile picture
I am a retired accountant with a background in large mining projects, from feasibility to full-scale operation, large scale primary industry and food processing, commercialisation of university intellectual property, and consulting to small businesses, government departments and insolvency practitioners. I have gained a wealth of experience from having the extreme good fortune to work, in a cooperative environment, with so many people far more intelligent and smarter than me; from scientists and engineers with MBA qualifications, to University professors across a range of disciplines. Through the accident of mergers, acquisitions and dispositions, I held, at various times, financial controller positions within Utah International Inc, General Electric Inc, and BHP Billiton organizations. If I have a special skill, it is in methods of assessment of projects with long lives, where costs are front loaded and/or future revenues are subject to considerable degrees of uncertainty. In relation to stocks, I have a theory, using projections to calculate a present value per share is far less useful for a share buying decision, than using those same projections for calculating future value per share for determining potential exit value and rate of return.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor and/or a tax advisor as to the suitability of such investments for their specific situation. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer, or a recommendation to buy, sell, or dispose of any investment, or to provide any investment advice or service. An opinion in this article can change at any time without notice.

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