By Rick Aristotle Munarriz (TMF Edible)
March 27, 2000

American Power Conversion

Ticker: (Nasdaq: APCC)
Phone: 401-789-5735
Website: www.apcc.com
Price (3/24/2000): $39 1/4

How Did It Double?

American Power Conversion sells safety. It sells the ability to maintain electric power through surges and outages. In essence, it sells consistency. And, no, I'm not talking about American Power's battery backup and surge protectors -- I'm talking about American Power itself.

The company has been a model performer. It has grown earnings every single quarter over the past four years. More often than not, those earnings have topped the bullish analyst estimates.

With a cash-rich and debt-free balance sheet along with the impressive financial metrics generated off its income statement, it's hard to knock off APC. And, no, I'm still not talking about the company's popular product line.

If you plug an uninterrupted power supply into your fundamentals, investors will come. With shares of APC more than tripling over the past year, that is exactly what happened. Investors came.

Business Description

American Power designs and makes uninterruptible power supply products, electrical surge protection devices, and power conditioning products for the entire range of computers and computer systems. It's a more diverse product line than one might assume at first glance.

The Rhode Island company sells its wares through retail outlets as well as packaged with products from major computermakers like Dell (Nasdaq: DELL) and Gateway (NYSE: GTW). In some cases it enters into remarketing agreements, as it has with IBM (NYSE: IBM). It services both the consumer and the corporate market.

Financial Facts

Income Statement
12-month sales: $1337.3 million
12-month income: $206.2 million
12-month EPS: $1.05
Profit Margin: 15.4%
Market Cap: $7755.8 million

Balance Sheet
Cash: $456.3 million
Current Assets: $899.9 million
Current Liabilities: $193.8 million
Long-term Debt: None

Ratios
Price-to-earnings: 37.4
Price-to-sales: 5.8

How Could You Have Found This Double?

When the Boring Port announced its purchase of American Power Conversion, it couldn't have timed it any better. The company was experiencing some bloated inventory at the time and the stock had been discounted due to working capital concerns. However, in the past the company had always found a way to clear out its stock of Back-UPS and Smart-UPS. Why would this time be any different?

Coincidentally, there was an articulate message board discussion thread between then Boring Portfolio manager Dale Wettlaufer and Whitney Tilson discussing the company at the time.

In the end, while the market may have been concerned with the outlay of funds to build new plants in faraway countries like India and China, Dale saw the opportunity and added the company to the Portfolio.

Investors who saw the same thing -- a steady grower in mid-hiccup -- were able to turn off the surge protector and let the market blow American Power out.

Where to From Here?

There's some high voltage in American Power's throughput. Net margins of 15%. Return on equity of 26%. Annualized sales growth of 25% over the last five years. It comes as no surprise that four out of five analysts -- no relation to the four out of five dentists who recommended Trident gum -- rate the company a "strong buy."

The expectations continue to run high for the company. Earnings are expected to rise to $1.27 a share this year, up 21% from last year's solid showing. Even better news comes from the fact that the bottom line growth is anticipated to accelerate next year through a 23% climb towards $1.56 a share.

Demand for computer peripherals is bound to continue as more of the world becomes connected. It's not right to expect American Power to fully partake in the growth of the upgrade market -- the new machines suck up the same juice as the old ones. (I'm on my third computer in the last three years, but my APC Back-UPS remains to bear witness.) However, there are plenty of first-timers out there and companies expanding their networks who will continue to ring up sales for American Power.

But unlike the computer makers, and most peripheral makers, few dominate the niche like American Power. It has used its size to build up economies of scale and has established a global network of manufacturing plants that will assure that the company remains the cost control leader. American Power's slogan is all too fitting for the equity itself: Legendary Reliability.

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