I had the opportunity to meet privately today with Walter Johnsen, the CEO of Acme United (ACU). If the overall stock market is guilty of being overheated, overvalued and over loved, then ACU is innocent on all counts.
If the "earnings estimates down-price up" and "all multiple expansion-all the time" dynamics of the S&P 500 baffle you (as they baffle me) then Acme is the perfect antidote. Why?
- It's cheap. Based on management's guidance of 2014 earnings per share of $1.28 to $1.30. ACU is trading at 12.4x 2014 EPS vs, the S&P's current valuation of 16.1x -- which is a Post-Crisis high.
- Recent results have been strong. ACU posted first quarter 2014 revenue growth of 9% and net income growth of 19%. That is a stark contrast to the S&P's 500's paltry growth of 2.7% on the top-line and 2.1% on the bottom line in the first quarter.
- It's providing real returns to its shareholders via dividends. ACU currently pays out at a $0.32 annualized rate, and I expect ACU's board to bump that $0.08 rate to $0.09 in the next quarter or two. Assuming a blended annual run-rate of $0.34, that gives a current yield for ACU of 2.1%. That's not impressive at face value, but a check on multpl.com shows the S&P now yielding 1.89%, so there is a differential. ACU's superior earnings growth rate also should allow for steady dividend increases on its normal pattern of once every 18 months.
- The business is much more interesting than it may appear -- which also makes ACU a target for possible suitors. I am fully aware that a company that distributes scissors, rulers and first-aid kits might not have the cachet of TWTR or TSLA. But the more time I spend on ACU, the more I realize there is differentiation in products like cutting tools (coatings are key) and that ACU's brands like Westcott (ACU is the world's largest producer of scissors), Camillus and Pac-Kit are valuable. As evidence of that, Johnsen noted that ACU's percentage of private-labeled sales is 12% and declining. Brand strength drives acquisitions, and ACU's $52 million market cap would be a tiny amount for a consumer products giant to digest.
- Management's visibility on growth extends years, not quarters. Johnsen and his board have a vision of growing revenues from their guided level of $100 million for 2014 to $160 million in four years. With some margin assumption expansion assumed on the higher revenue base--by my calculations--that would imply earnings power of $2.50 per share by 2018.
So, that's your alternative. The broad market's valuation is so driven by top-down investing via ETFs (especially leveraged ETFs) that it sometimes seems that stock-picking is a lost art. It's not.
There is room for identifying fundamental misevaluations, there are hidden gems, and illiquidity can hide more than it reveals. In my prior column on Acme, I used the "H-model" dividend discount model to derive a fair value for ACU of $22.18.
I didn't hear anything from Johnsen today to make me question the growth assumptions behind that valuation. So I'll continue to use $22.18 as my price target. With a current price of $16.05, that implies upside of nearly 40% (including dividends,) so I'll keep buying Acme United for my clients' portfolios.
