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On-the-ground research is key to understanding a business, especially if the business has operations abroad. And so, I spent the past week down in Costa Rica, checking up on the banana farms that Chiquita Brands
OK, so maybe my trip to Costa Rica wasn't a research outing (but shhhh, because I'm going to try to expense it as one). But it did get me thinking about our investment in Chiquita, which has run up about 16% since we bought it around New Year's and continues to outperform the market. It's only been a couple months, but so far Chiquita has been good to us. My only regret is that we didn't buy more. I had intended to buy stock in the company in pieces, but the rising stock price quickly put shares out of the range where I'd happily buy more.
Time to be aggressive
I am normally a fan of this strategy of buying in chunks, but when a great idea comes along, that's the time to be aggressive. That's why today I'm adding to our investment in Ampco-Pittsburgh
It's been just two weeks since I first put 3.5% of the portfolio into niche steel-equipment manufacturer Ampco-Pittsburgh. Nothing relevant has happened in the interim. That shouldn't be surprising because this is a company that flies under almost everybody's radar. As I mentioned in the initial buy recommendation, not a single analyst follows the company. Management doesn't do conference calls or investor presentations. Other than esteemed value investor Mario Gabelli (of GAMCO fame), there is scant institutional ownership -- and with a $260 million market cap, the company is unlikely to attract any big-money interest anytime soon.
The iron is still hot
The company remains dirt cheap. This is a cyclical company, and we're near the bottom of a cycle. According to my model, today's stock price implies that margins will shrink slightly and the company will grow sales at just 1.5% a year going forward. These figures just don't make sense. Over the last cycle, the company averaged 6.9% sales growth, and that includes three negative years -- one in which sales collapsed 24%. The implied margins don't add up either. If anything, we should expect margins to be slightly higher than historical averages, since the company just wrapped up a three-year, $60 million capital-expenditure program aimed at making its main facility more efficient.
The company is also cheap on a broad-view multiples perspective. At 4.1 times EBITDA, the company clearly is either not inspiring much confidence from investors or remains out of their sight. Frankly, it's probably both. And a stock for a company like this trading at 1.3 times tangible book value is simply cheap. Ampco's tangible book value is real stuff -- machinery, factories, and soon-to-be sold inventory. Today's stock puts the price of the company at just 30% more than the actual stuff it owns, which is silly for a company that generates as much cash as Ampco-Pittsburgh.
As I said the first time around, this is a small, unfollowed company. Its stock is going to be volatile. Over the long term, though, I believe the business's fundamentals will prevail and the stock will outperform the market. That's why today I'm adding an additional 1.5% serving (bringing our total allocation to 5%) of Ampco-Pittsburgh.
Alex owns shares of Ampco-Pittsburgh. The Motley Fool owns shares of Chiquita Brands and Ampco-Pittsburgh. Alex politely requests that you not tell Tom and Dave Gardner that he is expensing his Costa Rica trip to the Fool.
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