Alpha Pro Tech: Investment Thesis
Continued stock price volatility may provide an opportunity for traders to make a profit from buying and selling Alpha Pro Tech (APT) shares. Prior to the Q2-2020 income release, even based on optimistic assumptions, it did not appear that basic factors supported the share price in the long term. Based on guidance in 8-K submitted on 4 August 2020, the company is now estimated to be far below the optimistic sales conditions, at least in 2020. This only serves to reinforce the basics that do not support the current share price.
Alpha Pro Tech: Estimates of Incremental Sales Revenue for FY-2020 Revised Downward
According to Alpha Pro Tech Q2-2020 Revenue Release, it is possible to update the FY-2020 estimates per Table 1.2 below.
Total available protective clothing sales for six months ending June 30, 2020 were $ 28.6 million, which together with $ 15 million in building materials sales accounted for a total sale of $ 43.6 million for the first half of the year.The management's guidance in Q2-2020 8-K filing dated August 4, 2020 is for:
- Only $ 43 million of the $ 66 million orders for N95 face masks to be converted for sale in FY-2020.
- Face screen sales in the second half are expected to exceed $ 6 million in sales in the first half.
- Other PPE sales would be down in Q3-2020 due to production disruptions due to COVID-19 related closure of the production facility in India. Recovery in sales expected in Q4 unless there are further outages.
Net profit is total Sales of disposable protective clothing are now estimated to be in the order of $ 76 million for FY-2020. Considering the existing sales level before COVID-19, incremental sales for FY-2020 are now ~ $ 56 million per year. This is $ 17 million (23%) lower than the $ 73 million in revenue I allowed in my estimates in the previous article referred to above. The fall in the share price is not surprising, given the high expectations I think are built into the share price.
Alpha Pro Tech: Expectations of Increasing Sales Revenue for 2021 May Be Too Optimistic
Available Production Capacity
Based On the guidance given in Alpha Pro Tech Q2-2020 8-K, I estimate, as described above, that the previous grant of $ 73 million in sales in 2020 should be revised down to $ 56 million. It creates a need to take another look at the estimated sales estimate of $ 73 million for 2021 in my previous article. The two most relevant questions are:
- can the estimated shortfall in 2020 be made up in 2021? It will require increasing 2021 estimates from $ 73 million to $ 89 million; and
- given the 2020 period is at the height of the pandemic, why should 2021 sales estimates match or exceed 2020?
Alpha Pro Tech expects to complete the expansion of its production facilities by 2020 in order to deliver $ 100 million of orders by 2021. Against this background, the 2020 deficit should be offset by 2021 from a supply capacity perspective. Demand versus supply is another matter.
Increased production capacity in industry in general
Large-scale production of a face mask that meets N95 specifications is likely to require significant design and production capabilities. But it is not rocket science, and the longer demand is increased, the greater the incentive for new entrants with the necessary technical capabilities, which, once established, can continue to deliver even after COVID-19 is no longer a threat. Existing manufacturers, other than Alpha Pro Tech, are also increasing production capacity. According to this Bloomberg article March 25, 2020,
In two months, the company (3M) has doubled its global production of N95 masks to around 100 million a month, and plans to invest in new equipment to push annual mask production to 2 billion within 12 months.
Honeywell are also increasing N95 production, saying it will hire at least 500 people to expand the capacity of a facility in Rhode Island.
Decline in health care workers' demand Following the development of a successful COVID-19 vaccine
There has been a huge expansion in the widespread complete carrying of PPE by healthcare professionals as a result of COVID-19. Following the development of a vaccine against COVID-19, there will be a greatly reduced need for masks and PPE use can be expected to return to closer levels. How soon can a vaccine be developed? As of this July 16, 2020, Reuters & # 39; article,
The leading American expert on infectious diseases, Dr. Anthony Fauci, predicted on Wednesday that the country will meet the goal of a vaccine against coronavirus by the end of the year, and was not concerned of the prospect that China would get there first.
Decline in public demand for the development of a successful COVID-19 vaccine
Sales to the public will hardly be a significant source of demand for APT in the future. This ad from Amazon shows Before COVID-19 it was possible for the general public to buy face masks for the APT N95.
The ad above was shown on Amazon.com on February 26, 2020. Note the flag in the ad for availability. The masks were priced at $ 196.35 per pack of 210, just under $ 1.00 each. This flag was not displayed the week before and the ad is no longer running. But large numbers of ads for a wide range of face masks have now appeared on Amazon. A snapshot, for example, is displayed below.
Additional production capacity and reduced demand from healthcare professionals may lead to N95 masks again being available for sale to the general public. But the market will be quite different, with a likely crowded supply and many suppliers of face masks trading for $ 0.20 and less per mask. In addition, one only has to follow the media to understand that there is a lot of public opposition to wearing masks, according to the following excerpt from a NY Times article:
When people continue to go out in public in the middle of a pandemic , wearing or not wearing a face mask has become a personal statement and sometimes a political one … wearing a face mask – or refusing to – has become a hotbed in a moment when bourgeois rules are being rewritten, apparently in motion … The result has been dirty looks, angry words, raw emotions and at times confrontations that have escalated to violence … In Flint, Mich., A security guard in a Family Dollar store was fatally shot on Friday afternoon after a shift … over a customer refusing to wear a face mask, which is required in Michigan in any closed public space.
I expect that even for those who are willing to use a face mask, the will will be less time, due to the disadvantage and as the necessity decreases as a vaccine is introduced.
Summary and Conclusions
In my previous article, I argued that the $ 21.75 stock price at the time could not be justified based on the basics. This was due to increased sales of $ 73 million per year in 2020 and 2021. Based on Alpha Pro Tech management's guidance, current sales in 2020 are estimated to be much lower at $ 56 million. Although Alpha Pro Tech is likely to have good production capacity available in 2021 to cover increased sales of $ 73 million, there is likely to be lower demand in 2021 than in 2020. In addition, it is certain that there will be far greater production capacity chasing this reduced demand.
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Disclosure: I / we have no positions in any of the aforementioned shares, and have no plans to take up any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the shares mentioned or to solicit transactions or customers. The results from the companies discussed cannot continue, and the companies cannot achieve the earnings growth as predicted. The information in this document is assumed to be accurate, but under no circumstances should a person act on the information in. I do not recommend that anyone act on any investment information without first consulting an investment adviser and / or a tax adviser about the suitability of such investments for their specific situation. . Neither information nor any opinion expressed in this article constitutes an invitation, offer or recommendation to buy, sell or dispose of investments, or to provide investment advice or services. An opinion in this article may change at any time without notice.