Description

American Power Conversion Corporation designs, develops, manufactures, and markets power protection and management solutions for computer and electronic applications worldwide. The Company's solutions include uninterruptible power supply products, electrical surge protection devices, power conditioning products, and associated software, services, and accessories.

Two consecutive quarters of earnings disappointments from levels of high expectations have sent the shares of APCC plunging from a high of just under fifty dollars a share in late July of this year to a low of 11 1/2 dollars a few days ago. (Current price: $12.875)

The company has grown revenues every single year for the past ten years at an average compounded rate of 39.05%. Net income has increased every year but one, averaging 35.48% per year. The company has demonstrated remarkable consistency in its sales and earnings growth historically.

Furthermore, APCC has averaged 29.5% ROE over the last ten years, all the while with essentially no debt. (The company currently has a debt-free balance sheet.)

As for its valuation ratios: It is currently trading at historical lows in Price to Earnings, Price to Book and Price to Sales.

Weaknesses include a worrying increase in Accounts Receivable and Inventories over the past year, which I think helps to explain the dramatic fall in the share price. (Regarding the increase in Accounts Payable, the company says: "This increase reflects a growing portion of the Company's business originating in areas where longer payment terms are customary, including a growing contribution from international markets . . .")

Management is now projecting 5% to 15% earnings growth for 2001.

In conclusion, while a fall in the share price from over $48 was warranted due to a (temporary?) slowing of sales and earnings growth and the deterioration of the short-term portions of the balance sheet, the company remains fundamentally sound and attractively valued at the current price.

Catalyst

A move even slightly towards the company's historical earnings growth rates against the backdrop of the current much-lowered expectations.