In today’s report, Pat McKeough responds to a question from a Member of his Inner Circleabout a growth stock whose shares have soared in the past year. Air Boss of America supplies rubber-based compounds to a variety of manufacturers. In its most recent quarter, the company profited from a big jump in demand from mining companies (conveyor belts), tire manufacturers and the U.S. Department of Defense (boots). Pat assesses a recent acquisition made by AirBoss and looks at the company’s prospects of sustaining its rapid growth.
Q: Pat: Could you please give me your opinion on AirBoss of America? Thanks.
A: AirBoss of America Corp., (symbol BOS on Toronto; www.airbossofamerica.com) makes proprietary rubber-based compounds manufacturers use in tires, auto parts, boots and other products.
The company has plants in Ontario, Quebec, Vermont and North Carolina and owns 50% of a Malaysian joint venture. U.S. customers supply 70% of its revenue, followed by Canada (24%) and other countries (6%).
AirBoss has three main divisions:
Rubber Compounding (44% of 2014 sales, 37% of earnings) makes over 1,000 compounds from natural rubber and synthetic materials. Clients use them in products like escalator handrails, conveyor belts and pipeline connectors and seals.
Automotive (41%, 49%) makes products that cut noise and vibration in cars. The big three North American automakers—General Motors, Ford and Chrysler—are its main clients.
AirBoss Engineered Products (15%, 14%) makes protective gloves, boots and gas masks for militaries and fire departments, in addition to supplying rubber for retreading older tires and parts for recreational vehicles.
In the three months ended March 31, 2015, AirBoss’s sales rose 7.6%, to $76.9 million from $71.4 million a year earlier (all amounts except share price and market cap in U.S. dollars). The gain came from strong demand from mining firms (mainly conveyor belts), tire manufacturers and a contract to make boots for the U.S. Defense Department.
Earnings gained 28.2%, to $3.2 million, or $0.14 a share, from $2.5 million, or $0.11. The company spends around 1% of its revenue on research.
As of March 31, 2015, AirBoss held cash of $3.7 million, or $0.16 a share. Its long-term debt of $37.8 million is a low 7% of its market cap.
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Growth stocks: Acquisition of protective clothing maker due to add $30 million to AirBoss’s yearly sales
The company is using its strong balance sheet to make acquisitions. In June 2015, it agreed to buy Immediate Response Technologies (IRT), a privately held Maryland-based maker of protective clothing. IRT sells to clients in the medical and nuclear fields, as well as law enforcement and firefighting. It also serves military customers.
AirBoss will pay $37 million when it closes the deal in the third quarter of 2015. Depending on how well IRT performs, it may have to pay an additional $25 million over the next five years. IRT is profitable and will add $30 million to AirBoss’s yearly sales.
Adding IRT also puts AirBoss in a better position to win more contracts, particularly as the U.S. government plans to spend $5.5 billion on masks and other protective gear through 2018. Meantime, it can cut its costs by eliminating functions that overlap with its current plants.
AirBoss faces few competitors, and the “must-have” nature of its products helps shield it from cyclical downturns. For example, it recently won an $11.2-million contract to supply 550,000 pairs of protective gloves to the U.S. Defense Department. It expects to complete delivery of these items in the second quarter of 2016.
The stock has soared 147% in the past year and now trades a high 30.1 times the $0.80 a share AirBoss will likely earn in 2015. However, it trades at a more reasonable 20.9 times its forecast 2016 earnings of $1.15 a share.
The company has paid dividends since 2007 and recently raised its payout by 20.0%. The new annual rate of $0.24 (Canadian) yields 1.0%.
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