With vaccines flowing globally, case numbers down, mortality numbers improving, and YOY economic indicators screaming “BOOM!” the stock market’s ‘recovery’ stocks are must have holdings for all investors.
Airlines? Cruise ships? Banks? Restaurants? Oil companies? Take your pick and buy!
Doesn’t matter what the business was, if it was hurt by the pandemic, then it’s rallying now.
So that’s what this DRI article is about right?
Nope.
Today we’re looking at a company that sells masks and other PPE.
You’re gonna buy a PPE company at the end of the pandemic???
Well we’re not exactly known for timing the market around here. I mean, we bought a home builder in Calgary right when Alberta real estate is seeing its first real declines in years. We also passed on an oil company right before the 2021 oil boom started (it’s up about 200% in the 6 months since I wrote that article by the way…swing and a miss).
But one thing we do like doing is going against consensus. So while the rest of the world starts to turn its back on the ‘pandemic stocks’ like APT, I’m ready to go wading through the swamp to see if there’s anything I like.
What is Alpha Pro Tech
APT is a small manufacturing company headquartered in Markham Ontario that manufactures and produces various disposable protective equipment such as face shields, masks, shoe coverings, gowns, frocks, and coveralls.
Their 10-K also says they make ‘bouffant caps’ which I have to assume is one of these:
Hmm. Ok…Google tells me a bouffant cap is significantly less sexy…
Ok…well let’s not hold that against them.
Executive Summary
- Price at time of writing: $9.44/share
- The bad news: Prior to the pandemic APT very consistently sold 40-45M of equipment yearly and profited 2-4M per year (net income off of those sales). That’s not necessarily bad news except for the fact that the company currently trades for a market cap of 130M which is much too expensive for those numbers.
- The good news: In 2020 APT rode to the wave of skyrocketing demand for it’s products (which we all now use) to record sales. The company doubled revenue in the year (to 100M) and earned 27M in net income. If the future looks anything like 2020 did for APT then buying the company at its current market cap of 130M is a steal. On top of that APT has a pristine balance sheet and is sitting on a lot of cash which it will probably use for buybacks as enthusiasm for its stock has waned.
The bad news
APTs business was anything but exciting prior to 2020.
Before the pandemic the demand for personal protective gear was boring and predictable and so were the company results. Between 2015 and 2019 company earned a very predictable 2-4M per year with sales not really fluctuating at all YOY.
That means at today’s 130M valuation the company is extremely expensive compared to its history.
As mask mandates start to lift and many countries globally start to move on from their pandemic control efforts, demand for APT’s products is very likely to fall back to pre-pandemic levels and take most of the profitability of the company with it. If that happens the stock price has a long way to fall from the lofty valuation of 130M.
In addition to that, the market for PPE got extremely competitive in 2020 as many entrepreneurs saw overwhelming demand for PPE meet very limited supply and decided to throw their ‘bouffant caps’ in the ring and try to become PPE suppliers themselves.
My history in supply chain management tells me that it’s very likely that there is a glut of supply coming at in PPE for years to come and that is going to directly impact APTs ability to maintain margins.
The good news
There are actually several reasons to believe that the future for APT is going to be significantly different from its boring past.
First and foremost it is very likely that although our societal obsession with PPE will be toned down in years to come, that masks, gloves, and in some cases face shields, are here to stay for many professions.
In addition to that there is a very real possibility (although scary to think about) that the vaccines don’t end up being a panacea for all things COVID related and that we continue to have many PPE requirements for years to come.
Next there is the inevitable government changes to come as a results of the pandemic. One of these is no doubt a concerted effort by local governments to strengthen their local supply chains with respect to necessary public safety equipment (like PPE).
We all remember when 3M cut off Canadian shipments of N95 respirators and our Prime Minister (and Premiers) vowed to never leave us dependent on others for that type of equipment again.
Many other governments made similar pledges and APT could very well benefit should some of those programs materialize in the near future (keep in mind APT currently produces most of its products in the US).
Lastly there is APTs pristine balance sheet. The company has 23M in cash (most of which it made last year) and almost no liabilities (and no debt) meaning it is primed to invest where it sees opportunity or return cash to shareholders if that makes the most sense.
Conclusion
I do believe that the future looks more like 2020 than many of us care to admit (with respect to infection control, PPE, and masks) and although I really think that APT has a great deal of potential to outperform its history based on that I’m not ready to wager in their favour.
There are lots of unknowns including how the competitive landscape has changed for APT, how governments will approach regulating suppliers like APT, and also what the future course of the pandemic is.
With all those question marks out there I’m happy to sit and wait for a lower price for APT and maybe buy a little more of this guy while I do.
Disclosure: We’re passing on APT
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