Description
I posted Edelbrock (EDEL) in March. What has changed? The company just continues to deliver solid earnings despite poor economic conditions, and prospects for the new fiscal year, which began on July 1, look excellent. At its current price the shares appear to be significantly undervalued relative to its franchise value, earnings, earnings growth and asset value.
For those who did not see the previous post, here is quick note on the company’s products and market. Edelbrock sells specialty performance automotive components for the auto after market. 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. Just ask any car enthusiast about this company, as I have. The opinions are overwhelmingly positive in terms of quality and customer satisfaction. This loyal customer base allows the company to charge a nice premium for its products.
Updates:
1) In June the company distributed a ten percent stock dividend.
2) EPS for the year ending June 30, 2002 came in at $0.98/share, which was on target with my expectation of about $1 per share. (Note that in my previous write-up my estimate was $1.10 per share, but this was on a pre-stock dividend basis.)
3) First quarter 2003 EPS, historically the slowest quarter of the year, came in at $.16 per share up over 23% from last year’s first quarter. Sales we up moderately to $25.9 million from $25.4 million. The quarter reflected the impact of average price increases of 3.5% implemented in January and a much more attractive sales mix of higher margined products. Good earnings were driven by over six percent sales increases in carburetors and intake manifolds and over 40% growth in sales of Nitrous Oxide products.
4) In November, the company presented over 300 new products at the main industry convention, the Specialty Marketing Association convention in Las Vegas. The reception was excellent. The CEO, Vic Edelbrock, expects that the convention will add some real “horsepower” to the company’s 2003 earnings.
Outlook:
Vic Edelbrock is extremely enthusiastic about the company’s prospects. He recently commented that back-orders during the current quarter are much higher than last year. The company’s competitive position continues to improve. Despite the fact that the total sales of its customers and distributors are down, EDEl’s sales are up as the company continues to increase its market share. The company is bullish on sales volume and on its gross margin as it expects to sell more of its higher margined Edelbrock branded products. The company significantly increased advertising expenditures last year but expects these expenditures to be flat this year. My expectation is that EPS should easily increase a minimum of 10% this year to $1.10 per share, even without any material economic recovery. If industry sales growth resumes, EDEl should perform significantly better.
With expected net income of $6.0 million and depreciation of $5.4, the company should have cash flow of $11.4 million in fiscal 2003. Capital expenditures are expected to be $3.9 to $5.4 million. Thus, free cash flow should be $6.0 t $7.5 million in 2003 or $1.10 to $1.38 per share.
What is also interesting here is that the company owns an underutilized aluminum foundry, which the company claims is one of the best in the country in terms of quality and efficiency. Recently, the company has been doing profitable outside work to try to fully utilize the foundry. During the past quarter, representatives of General Motors visited the plant to perform a quality control audit. The reviews were excellent, as the GM representatives were impressed. The company considers the plant “a well kept secret” which should provide for a nice expansion of production with minimal fixed cost increases.
Valuation:
With a very conservative EPS expectation of $1.10 for the 2002 fiscal year, the stock currently sells for a P/E of 9.6. With growth expected to be in the 15% area as the economy recovers, the stock looks very attractive on an earnings basis. The company has a tangible book value of about $15 per share and thus sells for about 70% of book value. ROE looks poor at 7.3% but this reflects significantly under utilized manufacturing capacity and a very conservative balance sheet. The company has a current ratio of 4.7 and total debt of $519,000.
But all these valuation parameters don’t give any value to the significant franchise value that exists here. This is no commodity automotive parts manufacturer, but one that has a captive customer base that is willing to pay a premium for its products. This should translate in to some nice earnings growth over the next few years.
In summary, we have a stock with outstanding prospects over the next year, a unique franchise, strong customer loyalty, good operating leverage and excellent management selling at a P/E of 9.6 and at 70% of book value.
Catalyst:
- Wall Street clearly has not recognized the performance or prospects for the company. Management has become very aggressive over the past few months in courting investors and analysts. For example, it has invited analysts and investors to visit the company and the plant to see the company and its products first hand.
- The Board is considering a share repurchase program.
- The company is looking for a good acquisition.
- Vic Edelbrock, the CEO and majority shareholder, is 67 years old and might consider a sale of the company at a reasonable premium.
Catalyst
- Wall Street clearly has not recognized the performance or prospects for the company. Management has become very aggressive over the past few months in courting investors and analysts. For example, it has invited analysts and investors to visit the company and the plant to see the company and its products first hand.
- The Board is considering a share repurchase program.
- The company is looking for a good acquisition.
- Vic Edelbrock, the CEO and majority shareholder, is 67 years old and might consider a sale of the company at a reasonable premium.