Wednesday, December 9, 2009

Long Idea: Acme United

Acme United (ACU) is a multi-national supplier of cutting and measuring products to a diverse group of users, from schools to offices to industrial companies. The company trades for just $30 million, but has earned more than $15 million in net income over the last four years and has a current P/E under 10.

Usually, a company trading at such a discount to its recent earnings is going through a downturn of either a cyclical or secular nature. Acme is no exception in this regard, as sales and income are down as a result of the recession. But there is no reason to believe Acme's lower earnings are anything more than cyclical; the company has managed to stay quite profitable, and generates such strong returns that its low P/E is surprising. Consider the company's return on equity over the last several years:

Even in a down year, the company has still earned an ROE above 11%! Despite the fact that the long-term earnings picture for this company looks excellent, the stock dropped 15% after the last quarterly earnings report, as the numbers came in below expectations. As we've discussed before, Wall Street's focus on the short-term allows long-term investors opportunities to profit.

Management also appears to believe in the long-term future of the company, as it has spent almost $3.5 million buying back stock in the last few quarters, during a time when most companies have shut down their buyback programs due to a lack of confidence. Management collectively owns almost 25% of the company, so their interests are mostly aligned with those of shareholders.

When companies with high returns go on sale due to cyclical issues, long-term investors are offered the chance to profit. Acme appears to offer just such an opportunity.

Disclosure: None


Aaron said...

I'd like to email you an idea I wrote up, it is an 8 page pdf... is there a contact email I can send it to if you are interested?


Saj Karsan said...

Hi Aaron, with the caveat that I can't respond to every e-mail, you can reach me via the Contact Us page.

Bart said...

Hi Saj,

any opinion on CMFO? The company has a very high ROIC, and seems poised to grow steadily and profitably. Caveat is that I'm not 100% convinced they will be able to fund their expansion plans through cash from operations, so still a risk at dilution. However, the current valuation is starting to look quite tempting to me, and is comparable to ACU (low P/E for high ROIC).

Saj Karsan said...

Hi Bart,

I'll take a look and let you know if I have an opinion.

Saj Karsan said...

Hi Bart,

I've written about CMFO here.

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