Description

JPS Industries, Inc. is a major U.S. manufacturer of extruded urethanes, polypropylenes and mechanically formed glass substrates for specialty industrial applications. JPS's specialty industrial products are used in a wide range of applications, including: printed electronic circuit boards; advanced composite materials; aerospace components; filtration and insulation products; surf boards; construction substrates; high performance glass laminates for security and transportation applications; plasma display screens, athletic shoes; commercial and institutional roofing; reservoir covers; and medical, automotive and industrial components. JPS trades on NASDAQ under the ticker symbol JPST.

JPS Industries is the successor to JPS Textiles. JPS Industries emerged from a prepackaged Chapter 11 Plan of Reorganization on October 9, 1997.

JPS has spent the years since emerging from Chapter 11 divesting non-core lines of business and streamlining its operations to focus on its remaining two core businesses: JPS Elastomerics and JPS Glass. JPS has divested its apparel fabrics business as well as its home fashion wovens fabrics business, its yarn sales business, and its cotton commercial products business. Proceeds from asset sales were used to pay down debt and reinvest in the remaining core businesses.

JPS Elastomerics is a market leader in the manufacturing and marketing of scrim-reinforced, heat-weldable, single-ply roofing membrane. The Company offers two roofing products: a Hypalon ® based material and a prlypropylene based material. Both products are sold primarily to roofing distributors and contractors who install new and retrofitted roofs for commercial, industrial and institutional construction. The Company is a major manufacturer of polyurethane film, sheet tubing, cord and profile for applications in athletic, automotive, medical, industrial and consumer products industries, and plasma screens.

JPS Glass manufactures and markets mechanically formed fiberglass substrates. With their high strength, fire, moisture and chemical resistance, and low electrical conductivity, these substrates provide the perfect platform for construction of printed circuit boards, exterior insulation facing systems, filtration products, surfboard substrates, composite materials for aircraft cabin interiors and cargo liners, and other industrial applications.

The Company operates two highly automated facilities for the Elastomerics business and one facility for the Glass business. JPS employs about 800.

The company had fiscal 2000 revenues of $168 million and EBITDA of $20.4 million. 2000 EPS was $.63. CapEx was $2.6 million. All figures are from continuing operations. With the softening in the economy, the Company’s first two fiscal quarters of 2001 have been negatively affected somewhat.

For the last twelve months ended April 28, 2001, Revenues were $170 million, EBITDA was $20.33 million, EPS was $.70, and CapEx was $6.1 million.

With its second quarter earnings release of May 15, JPS gave guidance for fiscal 2001, reaffirmed publicly on May 31, of revenues of about $160 million, EBITDA of about $18.8 million, and EPS of $.70 to $.75. The Company had net debt as the end of the second quarter of $27.3 million. The Company bought back 575,617 shares of common stock on December 19, 2000 for $2.1 million. It now has 9.174 million shares outstanding. With the stock presently offered at $5.40, equity market capitalization is $49.5 million. Total enterprise value (“TEV”) is $76.9 million.

The biggest holder of the Company’s stock is its own pension trust with 21%. Other big holders include Magten Asset Management (11.3%), Northeast Investors Trust (11.3%), and UBS (11.2%). Noted value investors Steel Partners filed a 13-D with 9.1% on May 25.

The company has $90 million of NOLs, and expects cash taxes to be in the range of $0.50 to $1.0 million per year in the next year. CapEx is expected to be in the range of $4 to $6 million per year for the forseeable future. Management has been using the Company’s substantial free cash flow to pay down debt and expects debt to be down to $20 million at the end of fiscal 2001 (October 2001). The CEO has stated the Company could be debt free in 18 months or so. The reduction in interest expense that goes with this deleveraging will also drive EPS growth.

JPS’s closest publicly traded peers and competitors are Hexcel Corp (HXL), Omnova Solutions (OMN) and Carlisle Companies (CSL). Below I present the trailing trading multiples of JPST (except 2001E EPS), along with the arithmetic mean multiples of the peer group of three. The last column is the implied price of JPST if it were to trade at the same multiple as its peer group.

JPST Peer Group Implied Price
TEV to Revenues: .45x .83x $12.41
TEV to EBITDA 3.8x 7.4x $13.46
TEV/(EBITDA-CapEx) 5.4x 13.9x $18.54
TEV to EBIT 5.4x 13.9x $18.76
Price 2001E EPS 7.4x 20.2x $14.63

Clearly, JPST is undervalued compared to its peers. While I do not expect it to trade at quite the same multiples as its larger capitalization peers, I think the stock could easily be a double from here. The disparity in multiples is just too great. Reasons for this disparity include JPS’s small-cap status, lack of analyst coverage, and the fact that JPS has been undergoing a transformation since its emergence from bankruptcy in late 1997. With the restructuring/transformation complete, I would expect the Street to be better able to focus on the Company and its prospects going forward.

Catalyst

With the sale of its last non-core business in the latest quarter, JPS has completed its transformation from a diversified textiles company to a focused producer of specialty engineered products for industry. The company trades at trading multiples of about half its peer group on most measures. WIth the transformation complete, I expect the Street to gain a better understanding of the Company's inherent value. Management is focused on enhancing shareholder value and has bought back stock in the market and is pursuing an aggressive deleveraging goal.