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Alpha Pro Tech: Hidden Value In Building Supply Segment

Apr. 11, 2021 10:11 AM ETAlpha Pro Tech, Ltd. (APT)24 Comments
Bryan Shealy profile picture
Bryan Shealy


  • Covid-19 resulted in massive cash reserves and a high return on assets.
  • This cash can easily be utilized to grow its adjacent building supply segment that has already seen growth in 2020.
  • Growth in housing construction will help APT effectively compete in competitive markets.

New Home Construction in Rochester, Michigan
Photo by RiverNorthPhotography/iStock Unreleased via Getty Images

Recently I had the pleasure of reading The Little Book That Beats The Market by Joel Greenblatt. I was introduced to the magic formula and while the underlying mechanics are fairly complicated, on the surface it's rather simple. It looks at return on

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Bryan Shealy profile picture
Visit Exploitinvesting.com and read analysis on small cap Japanese Stocks. I'm a Millennial Investor, efficiency fanatic, inventory specialist, environmental capitalist, and Benjamin Graham follower. Previously a freelance writer for broken leg investing. I enjoy writing articles about deeply undervalued companies. I focus on micro cap and small cap companies since they offer the most potential. Currently I run two portfolios, one with my in depth researched American stocks below book value and the other a quant portfolio focusing on international net nets.

Analyst’s Disclosure: I am/we are long APT. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (24)

Marco Atzeni profile picture
I'm having some troubles understanding the calculation of the ROA and ROIC. If you use EBT as the numerator, the result would be 15.7% as a 5-year average (in the denominator I excluded cash/cash equivalents and account receivables).
@Marco999 I've tried to do the same. How did you treat the "equity method" accounting for their JV in India? It's a line item on the balance sheet from what I see? What's the true return, or, even value? It's now a really big part of their business, and, the JV manufactures product, then sells it to APT who in turn sells to customers? I understand excluding cash from your calc, but it's not really a true measure of managements effectiveness if you do that, is it?
Marco Atzeni profile picture
@crackshot123 I included the earning power of the joint venture but overall I get an Earning power of the entire business of approximately $8/share. This gives us a margin of safety of 24% which is not so attractive imho.
Strategic Investor profile picture
@Marco999 Yup. This is a ho-hum business that has certain volatility that makes it potentially attractive (I was fortunate to buy shares in 2014 in August, right before the ebola scare drove shares to $10 ... it's fun to sell into those rallies).

The only other aspect of this is that the persistent repurchases have increased per share value and have also increased volatility, if you are very patient.
Do you think the current Corona situation in India can have a big impact on the APT revenue?
Bryan Shealy profile picture
@seeakingg depends on if the places that its manufacturing its supplies at get shut down. So it's possible but, then on the other hand they have a lot of customers over there for their ppe division.
amateur_investor_ profile picture
Strong buy on strong fundamentals. The rest is noise and the usual wall street story telling which influences short term traders but amounts to jack.
pat45 profile picture
it is nuts that OMI and LAKE have high PEs with their PPE business and yet APT always hit for mask PPE which is only a portion of their PPE plus have a lot of building business
Strategic Investor profile picture
@pat45 I can't speak to OMI, but LAKE has a garment business that is higher quality than APT's building supply segment.
For this shit, the only way to play is to sell puts. However, the puts are priced too cheaply so it makes no sense to play with this one.
Strategic Investor profile picture
This article would have benefitted from more research. Why people always look back about as far as the most recent 10K amazes me. IF you are serious, why not go back 10 years to see how they have competed in the industries they serve.

One has to really get inside of the building supply industry dynamics and APT's role in it to have a sense of what might happen here and broadly speaking, APT is the low man on the totem pole battling the overwhelming market share case; Tyvek.

It seems to return okay returns on capital employed, particularly after they finally managed to liquidate a bunch of inventory they had been carrying. But you have to subtract the impacts of the unusual spike of sales and then also take out the excess cash associated with those sales and then judge the company on normalized potential. There are plenty of risks to their business and you can lose quite a bit of money here, at least at these prices.
@Strategic Investor Are we to "assume" you have researched APT the last 10 years to make the statement "There are plenty of risks to their business and you can lose quite a bit of money here, at least at these prices."? And, "normalizing" sales revenue in a time like this? Right. Finally, what multiple of FCF or PE do you assign if your crystal ball is clear enough to normalize? Personally, I like the position of the company, but I don't like the management. They hide things, even good things.
Strategic Investor profile picture
@crackshot123 I have read all of their 10Ks available on sec.gov, which I think go back to some 10K-405s from 2001-2003 or so. I don't quite recall. I owned this in 2014 and made alot of money; I thought it cheap at $2 or so per share (they had over $3 in assets, even after making some assumptions about inventory) and I was rewarded more than I deserved when the Ebola fears stoked by an electioneering cycle and desires to indict the Obama admin for incompetence, had certain news outlets spending days demanding "track and trace" programs for anyone who migh thave been on a plane and such. There were rumors about one nurse who might have been exposed to Ebola flying on a plane from Texas or some such thing. Anyway, it was hysterical. The shares rose to $10. I sold into the rally so didn't 5x the whole lot (though I did sell my last batch at $10), but I better than 3x in about 3 months (Aug to Oct). LAKE had a similar experience, rising from $5 to $27 over the same period and for the same reasons - massive excitement about the potential for PPE sales.

In any event, it was mostly hysteria about Ebola, and the shares crashed to $1.50 or so. I should have purchased at that point, but I was quite frustrated with then management, because they were building inventory and building inventory; at some point, they couldnt really consider them all current assets; I was doing models and concluded that they had 1000 days of inventory in certain categories.

I of course, should have reloaded my shares, but decided that lighting was unlikely to strike twice and passed.

Your concerns about management are understandable. Management was "changed" about a year after the events I relate, when the co-founder was "retired" and his son, the present CEO, took over. So this is a family led business. These often have good track records, and the present CEO did finally undertake a massive reduction in working capital in the form of inventories mostly, which has provided the cash for the ongoing buybacks. The biggest individual shareholder, who is also a director and wife of the former chairman (the other co-founder) and a former employee.

So, yes, we have to expect that they run things for their own benefit to no small degree, and quite frankly probably have a sense of posession that someone at a larger company might not (then again, how much do folks like the Fords, or the Buffetts, or the Grahams, have the sense that they own the place). The question is, are they being fair to shareholders. Until the pandemic, I think they were ok. The business grew, but very slowly and they were managing the balance sheet for value, but that was where the value was. Since the pandemic, there has obviously been a big income statement opportunity. I can't really fault them for taking advantage of the FOMO / MOMO trading being done in the name. It was obvious to anyone who had researched the company that they didn't have anything like the capacity available to generate enough incremental revenue to justify $40 per share (or even $30). One had only to realize two simple things - first, that companies cannot 10x production overnight unless they have immense unused capacity (in which case, they are probably earning miserable returns on capital) so scaling would require time and second, that given that timetable, larger competitors would have the ability to scale in similar ways, and would, in any case have more aggregate capacity to fill orders. (Third, that governments tend to favor incumbents and prefer larger companies who can meet their many mandates). In short, N95s were going to be a boon, but they weren't going to matter more than a few dollars of valuation. That's not nothing for what was a $4 stock. But N95 masks do not turn the other parts of the company from $3 to $15 or something. Those parts of the business were slow growth and had experienced some margin pressures. It is still a $4 stock with a one time COVID surge, plus cash. what is that worth?
@Strategic Investor Thank you for excellent background/description. Regarding FOMO/MOMO comment - I understand and really don't blame insiders for sales, however, in this case it seems suspect because of the public release the day before insider sales, including cashless option exercises, which highlighted forward sales and growth. As you know, the company rarely, if ever, makes public statements, but this time they decided to do so, and then sold before the news was really properly disseminated (my view). Good planning? You mention the 10%+ owner, Ms. Millar, who recently filed her first and only 13D. She took about $13.6 million off the table in one trading day. Why all of the sudden did she file the D? Certainly, an attorney advised to do so for a reason. And since I've finally found someone with knowledge and a lot of experience w APT, do you have any thoughts on the accounting method used for their JV in India? APT has half the BOD seats, represents almost all of the business given to the JV, yet owns less than half. Why are they seemingly "hiding" these numbers through equity method of accounting? As for what APT is worth? Market will tell us I imagine, but I do appreciate your perspective.
Bryan: Any thoughts on how BV may be understated due to using equity method of accounting for their India JV? It's my understanding almost 100% of the sales by the JV come from APT, yet they (APT) owns only 42%. Make sense to you? Any value to their "proprietary" coating for house wrap materials? Their price points are very competitive and I understand the product(s) are excellent. Totally agree with you and another reader shareholders should receive either a special dividend, ongoing, or both. Last, any comment on the timing of stock sales by all of the officers on 2/28/20 at the all time high? Luck or do you think the press release on 2/27/20 helped boost the share price just in time for them to sell?
Hmmm. Drop in half and then double. That would leave it where it is today. I am tempted and are watching.
No Called Strikes Investing profile picture
Thanks for the article. It is an interesting contrarian take; as you point out the strong market expectation is that this goes back to pre-pandemic levels once the bulk of the US population is vaccinated, without giving much thought to the building supply side of the business.

I admit that I would lean towards the market being right on this one though; for nearly the last two decades this company has been about as predictable as possible. It is going to generate somewhere between $40-48 million in revenue and bring in about $3 million in net income and free cash flow on average. At the peak of new home construction starts in the mid 2000s (tradingeconomics.com/...), you were seeing revenues still below $40 million and net income consistently below $2 million. That isn't a super strong endorsement that APT will be able to dramatically benefit from a new construction boom. It seems like at best, assuming we see a continued move up in new home starts, APT could get to maybe $4-5 million in net income / FCF a year (which would be about a 50% above a very stable historical normal), and even with the banked cash from the Covid pandemic the company's EV is around $110 mil. So, in what is still a very good outcome, you are looking at an EV about 22x expected earnings at today's market cap. That is a little below the general market, sure, but doesn't seem obviously cheap to me either.

On the other hand, I don't think there is any real meaningful risk of ruin; the company hasn't reported negative income for decades and the business is generally cash generative, plus they now have quite a large cash stockpile. As you point out, I think the downside is probably limited to about 50% or so, but it is hard to see there being much more than 50% upside either at the current market cap. I guess it would be an interesting bet on another surge in Covid cases and hospitalizations before herd immunity is reached with the vaccines, or on the virus mutating enough such that the vaccines aren't as effective as they need to be.

I guess all that to say the company is interesting and you highlight an important point that I agree the market isn't talking much about. It is on my watch list and I could see myself starting a position if the market overreacts and sends this down closer to a $70-$80 million market cap; otherwise I see too many other places to put my $ where I think the risk/reward ratio is more favorable.
Bryan Shealy profile picture
@Carleton Hanson thanks for the added perspective! Nice to hear from you. Are you finding most of your undervalued stocks in the United States still or do you have to look abroad?

My analysis doesn’t take into account the continued outperformance of the Ppe segment for the next year. Which it’s looking increasingly to be still robust. Also from experience if hospitals take on a new supplier then they are likely to use them more in the future. Getting a foot in the door is half the battle so the added hospital revenue is likely to be higher than before.
No Called Strikes Investing profile picture
@Bryan Shealy That is a good point that will still be some continued bump to PPE this year as well, and probably at a high cash conversion rate. And yeah, if there is any kind of additional surge, could be a semi-prolonged bump.

I'm still mostly looking at US companies; I agree it is getting pretty tough out there to find clearly cheap stuff though
What sort of clowns are they doing buybacks at elevated prices when the whole world knew the stock price would drop once vaccines were rolled out.
Bryan Shealy profile picture
I totally agree it was an extremely dumb thing to do. It was likely them being greedy trying to boost their stock options. Dividends would have been way more efficient.
Strategic Investor profile picture
@Astute The kind that were selling their stock at the same time the company was buying it back.
@Astute Except buybacks give insiders even more control? They don't need money/dividends after selling shares for cumm net value of what $60 million?
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