Description

Quipp is a tiny company which has approximately 80% market share of its niche. It designs, manufactures, installs, and services post-press material handling equipment for newspapers. This is a story about a company which has potential to produce great cash flow relative to its current price during good economic times but beginning in the second half of 2001 the economic downturn dramatically decreased advertising and newspaper companies dramatically cut back on capital expenditures severly hurting Quipps business. There is a good writeup on this company in April of 2001 unfortunately shortly thereafter the economic downturn hit causing the price of this stock to fall dramatically. This company has a prior history of going through an economic downturn in the early 90's and when it came out of that downturn the stock tripled. Given the current price and the earnings potential when the business turns for Quipp it has the potential to provide similar results.

Currently Quipps market cap is $16.37 million, it has only $650,000 of debt and it has cash & equivalents of $8.44 million for an enterprise value of $8.58 million. In between Quipps 2001 downturn and its 1993 downturn Quipp had substantial growing income and sales as follows:
Income in millions Sales in Millions
1994 $1.38 17.03
1995 2.10 23.20
1996 2.22 21.57
1997 3.08 27.02
1998 3.35 27.12
1999 3.67 31.63
2000 5.01 35.35

In addition it returned a substantial amount of cash to shareholders in special dividends, stock buybacks etc.

In 2001 sales fell suddenly in the second half of the year and total sales ended at 21.67 million and in 2002 sales fell further to 16.26 million. As a manufacturer the company has a great deal of fixed costs and therefore operating leverage providing a disproportionate increase in the bottom line with sales growth. I believe with a turn around in the economy which already appears to be happening the company could easily get back to the mid $20 million range in sales and net income of $2 million in the next 2 years. Given these potential results you are paying 4 times the my projected net income.

The big question is whether or not the economic turn around has begun and newspaper companies will begin spending capital again. I believe it has for the following reasons.

1. The overall economy has picked up and with the positive returns in the stock market there is a much greater sense of optimism causing companies to begin spending money.
2. Quipp's sales have grown over the equivalent prior years quarter for the last two quarters which has not happened since 2000. In the second quarter of 2003 the growth was 12% and in the third quarter the growth was 30%.
3. I analyzed Quipps backlog for the last 11 quarters and the following is the result:

Quarter 2003 2002 2001
4th $4,686,000 $6,611,000
3rd $10,783,000 4,506,000 6,400,000
2nd 7,021,000 3,224,000 5,376,000
1st 6,440,000 4,973,000 11,212,000

As you can see from these results Quipps backlog has steadily increased since the 2nd quarter of 2002 and in the 3rd quarter of 2003 it is back to the level that has tended to generate sales in excess of $20 million.

The risk of this stock is the turn around does not occur to the level I hope as quickly as I imagine; however the company has the financial strength to ride out a longer down turn with substantial cash and little debt.

Catalyst

Improvement in economic cycle increasing sales and dramatically increasing profits relative to current price.