Historically, during a pandemic, the demand for personal protective equipment (PPE) tends to fade rapidly after an outbreak subsides. If the coronavirus follows the same pattern, can Alpha Pro Tech 's (NYSEMKT:APT) core revenues be safeguarded?

Alpha Pro Tech is a small-cap global manufacturer of personal protective equipment including medical face masks, face shields, and infection control suits. The company's manufacturing facility is located in Salt Lake City, Utah. In its first-quarter earnings reported May 6, its revenues grew by 47.5% to $18.2 million year over year, driven by the surging demand for PPE due to the coronavirus outbreak. Indeed, the company has been landing million-dollar deals left and right for its medical masks and shields, and between 8% to 14% of its clients are content with delivery dates stretching to 2021.   

In addition, Alpha Pro Tech's bottom line recorded a 300% year over year increase to $0.39 per diluted share. At an annualized rate, its earnings per share amounts to $1.56. In other words, if the current trend continues, the company's stock may be trading for as little as 8.6 times forward earnings. As a result, the company has garnered significant interest in the investment community as to whether it can lead shareholders to riches.

Health care workers wearing face masks in front of a hospital.

IMAGE SOURCE: GETTY IMAGES

The bearish side of the story

Skeptics of Alpha Pro Tech present the simple argument that once a pandemic ends, the demand for PPE tends to fall rapidly. Let's be real here, nobody really likes to wear masks unless we absolutely have to, especially during the heat of summer. When the H1N1 pandemic ended in 2010, Alpha Pro Tech's mask sales fell by 76.9%. Its share price also declined by over three quarters from its $7 peak in 2009. Hence, investors may witness the same pattern yet again when the COVID-19 subsides.

The bullish side of the story

Currently, countries around the world are scrambling to stockpile PPE, and are facing widespread supply shortages. For example, in Canada, where Alpha Pro Tech's headquarters is located, the government has ordered 333.5 million surgical-grade masks. However, by April 22, only 18 million masks had been delivered. Furthermore, the issue of quality control has become a significant problem. On May 8, CBC News reported up to 8 million out of 11 million masks ordered from China by the Canadian government were considered to be substandard.  

This is is by no means a problem localized to Canada. In the U.S., the production of N95 medical masks (named for the supposed fact it blocks 95% of airborne pathogens) was supposed to be strictly regulated by the government to ensure they meet their medical standards. However, due to a massive shortage, the Food and Drug Administration approved the use of a Chinese equivalent called KN95. Recently, tests conducted by MIT indicated some KN95 masks currently circulating across the nation only blocks up to 30% of potentially viral air particles. 

These quality issues aren't a problem for Alpha Pro Tech, as the company's material selection and manufacturing are 100% conducted in the U.S. Alpha Pro hasn't faced any accusations its PPE products are sub-par.  

Another scenario for investors to consider is the resurgence of COVID-19 once the curve has been flattened. In previous respiratory pandemics such as the Spanish Flu and H1N1, there were second and third wave outbreaks that infected and killed significantly more people than the first wave, all within the span of one year.  It is possible if this happens, then the demand for PPE worldwide may skyrocket to unprecedented levels.

As for its financials, Alpha Pro Tech has more than $17 million cash on hand, with no debt whatsoever. Its current ratio, as defined by its current assets divided by current liabilities, stands at over four times. This means the company can devote ample capital expenditures into expanding its manufacturing facilities, without worrying about lack of access to capital, which is a common theme during recessions.

Woman with mask shopping for apples in the grocery aisle.

IMAGE SOURCE: GETTY IMAGES

So who is right?

While claims on both sides have their merits, there is one key detail that points definitively to the bullish investors' favor. The reason why the current COVID-19 outbreak has caused so much havoc is the presence of large clusters of asymptomatic carriers.

In previous epidemics, health officials were able to effectively prevent the spread of disease by quarantining those who showed symptoms, which simply isn't the case here. Between 25% to 50% of those infected with COVID-19 show no symptoms, while each individual infected with the virus has the potential to spread it to up to four other persons. One study (that has not been peer-reviewed) found 10% of asymptomatic carriers show no symptoms of the virus until after the standard 14-day self-quarantine governments around the world are imposing.   

I don't think the virus will be going away even after second or third waves of infections unless it mutates into something far less contagious. It's possible there will be clustered outbreaks of COVID-19 around the world for years to come. Therefore, the fear of becoming infected by contact with individuals who appear to be healthy will no doubt be a persistent trend even as economies around the world recover, and lead to a steady stream of demand for PPE.

For brave healthcare investors who are not afraid to buy stocks after they have appreciated significantly, they may be well rewarded for adding Alpha Pro Tech to their portfolios.