Friday, December 26, 1997
HOW DID IT DOUBLE?
American Locker Group doubled the old fashioned way -- the company made more money selling a basic product. The small Jamestown, New York-based company sells large mailboxes used in post offices, better known to the U.S. Postal Service (USPS) as the Neighborhood Delivery and Collection Box Unit (NDCBU).
In early 1989, American Locker developed a polycarbonate all-weather parcel locker that could be used at post offices to receive and distribute mail. To date, American Locker Group has sold 129,000 of these lockers to the USPS, with the bulk of them sold over the past three years.
Although the product has been around for a while, things only really started to get going in late 1994. In November of 1994, American Locker Group negotiated a formal contract with the USPS and since then has sold $22 million worth of plastic Cluster Box Units (CBUs) through March of 1997. It has been these sales that have served as the engine of growth for the company, as sales of conventional metal, mechanical, and electronic lockers have been flat for years. With the addition of Outdoor Parcel Units (OPU) to the product mix, American Locker Group has enjoyed solid growth this year.
American Locker Group is a leftover from a much larger conglomerate that was spun-off to shareholders in 1964. From 1965 to 1989, the company was engaged in a number of businesses, including the manufacture and sale of voting machines.
In 1989, the company got into the business of making specialized lockers for the Post Office and mass transit stations. In 1990, the company divested itself of its manufacturing unit and locked this company, now called Signore, into a ten-year contract to build products at Signore's standard cost divided by 80%. The contract expires in June of 2000.
12-month sales: $25.6 million
12-month income: $1.5 million
12-month EPS: $1.82
Profit Margin: 5.9%
Market Cap: $18.6 million
Cash: $0.9 million
Current Assets: $9.3 million
Current Liabilities: $3.2 million
Long-term Debt: $2.6 million
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Due to increased sales volume through most of the year, the company has shown rising margins on top of rising sales -- which any number of screens would have picked up on, including the Fool's own Rising Margin screen. The stock showed up in two articles in Worth magazine on stocks that Peter Lynch and Sir John Templeton would have liked. Despite the company's tiny size, the strong revenue growth and increases in earnings per share combined with the management's penchant for repurchasing shares with excess capital made the stock attractive from a quantitative point of view.
One additional factor that may explain a large part of the Double is that the stock was just darn cheap a year ago. On December 15, 1996, the shares traded at 7.7 times trailing 12-months earnings and 0.47 times sales. You use all of the stock screens that you want, but most doubles come time and time again from companies that trade at exceeding low valuations before the doubling process begins.
The benefit of this sort of investing is quite powerful, as companies with exceedingly low valuations tend to have minimal downside risk as well. By concentrating on companies with growing sales and revenues and a low valuation, you could have picked up on this stock a half a dozen different ways.
WHERE TO FROM HERE?
American Locker Group is at the whim of the U.S. Postal Service when it comes to order flows. Although the company has had pretty good volume in the past year and believes that it is enjoying increasing acceptance at Post Offices across the country, it does have two competitors that also want business. American Locker Group believes its plastic locker is better than the aluminum lockers both of its competitors manufacture, but any slight slowdown in sales growth could cause a big lump in the earnings.
Long term, the company is slowly taking itself private. Management consistently repurchases and retires stock every year. Although the $200,000 to $300,000 in stock retired every year might not seem like a huge amount, this still represents about 1% of the outstanding shares. Management purchased about $250,000 worth of stock in the last quarter alone, and if they buy back more than $50,000 in this quarter they are on track for an annual record. This combined with the fact that the company's chief executive has consistently purchased more stock (last purchase in April) over the past few years speaks well of American Locker's capital management strategy.
Given the limited market the company can appeal to and the relatively lumpy nature of past earnings, it is unlikely American Locker will ever enjoy a premium valuation. Even though the share repurchases are a positive factor, you have to consider the risks that the company could see in a down year like it had fiscal 1996. In fiscal 1996, however, the company had tough comparisons with a banner 1995 when it started selling the CBUs in volume.
From here on out growth will probably be limited to 10% to 20% per year rather than the 80%-plus per year the stock has returned since the beginning if 1995, but there seems no overwhelming reason to sell if you own the shares and no overwhelming reason to buy if you do not.
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