Description

In this difficult economic and market environment where just about every company is reporting poor operating results it is great to see a company like Edelbrock reporting excellent operating results. Edelbrock sells specialty performance automotive components for the auto aftermarket. Most of its products essentially increase the horsepower of cars and motorcycles. Products include carburetors, intake manifolds, exhaust systems, suspensions, cylinder heads and nitrous oxide systems. Its products are extremely highly regarded by automotive and motorcycle enthusiasts.

The company’s recent performance can best be summarized by a quote from Vic Edelbrock, Edelbrock Chairman and CEO. “Unquestionably, Edelbrock’s performance is still being hindered by the economy. But we’re continuing to grow in spite of those conditions. That tells me two things: that market for Edelbrock product continues to be vibrant, and Edelbrock is exceptionally good at serving the market.” In the recent quarter (second quarter ending 12/25/01) sales were up almost 11% and income was up to $.26 per share versus $.25 per share last year. New product sales were particularly strong in the quarter. This is clearly not an old company (it was founded in 1938) that is relying on old products.

In the fiscal year ending June 2002, I would expect earnings to come in around $1.10 per share down from last year’s record of $1.55. Sales, thought, aided by a recent acquisition should set a record. At its recent price of $11.70, this stock trades at around a P/E of twelve. I would consider this attractive for a company with excellent prospects and outstanding acceptance by its customers. With depreciation and amortization per share of about $1.20, it trades at a price to cash flow of five (excluding capital expenditures)! I would expect earnings to recover to the $1.50 level as the economy recovers.


The company’s balance sheet is pristine. The current ratio is 3.8. Long-term debt is minimal at $579,000, which is less than one percent of its capitalization. Net current assets or liquidation value is about $8.23 per share. Tangible book value is $15.63 per share. Inventory and accounts receivable turns are manageable. The company thus sells for about 75% of tangible book value.

The main difficulty with this stock is its liquidity. Insiders control about 63% of the outstanding shares with the Edelbrock family accounting for most of the insider position. Patience is required to purchase this stock, but I believe the rewards are excellent here. As earnings recover, even if the P/E does not expand we are looking at a $17 stock. Historically these shares have traded at or above book value and at a P/E as high as 20. I would target an $ 20 price for these shares.

In summary, we have a stock with outstanding performance, strong customer loyalty and good growth prospects selling at a P/E of 11, a price to cash flow of 5, 75% of book value and at 40% premium to liquidation value. They do not get much cheaper than this!

Catalyst

The catalyst for the price recovery for these shares will be the economic recovery. Once the automotive industry experiences recovery, this small gem will be rediscovered.