Transcript
Elkington
Buy
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Table of ContentsElkington
I. Thesis
II. Industry analysis
III. Company research
IV. Risks
V. Macroeconomic Trends
VI. Valuation
VII. Conclusion
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I. Thesis
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ElkingtonThesis
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P&F Industries (NASDAQ:PFIN)
Recommendation:BuyCurrentPrice:$9.13TargetPrice:$19.90
Catalysts
Risks
6/10/16
§ Activistinvestor,AndrewShapirokeepingmanagement focusedonrealizationofcompany’svalue
§ Internationalgrowth§ PotentialsalesfromCraftsmanbrandandpartnershipswithHomeDepot
§ P&Fhaslostsalesfromdeclinesinoil&gasmarket§ Willbeedgedoutofaerospacemarketbylargercompanies§ Willnotrealizeoperational savingsfromNationwidesale
ElkingtonThesis
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Recent News
Q1 Lawndale Feedback
6/10/16
2016 Q1 Earnings Call
§ FloridaPneumatic: 5.6%revenuegrowthYOY,butquarter-over-quarterdeclinesinboth theindustrialcatalogsectorof$224,000andotherproductsalesof$97,000mostlyduetoongoingoilandgasexplorationandextractioncrisis
§ ThepriceofcrudeoilcontinuestonegativelyimpactHy-Tech’sperformance.Withlowcrudeoilpricing,manyrotaryrigshaveclosedandaretemporarilynotfunctioning
§ Pneumatics'grossmarginimproved0.8percentagepoints ,whileHY-Tech’sgrossmargindeclined9.1percentagepoints
§ SaleofNationwidehashelpedreducedebtonbalancesheet
§ JosephMolinoisconfidentthatHy-Techcankeepworkingrelationshipwithmajorcustomerthathasin-sourced
§ Andrewisfocusedonwheregrowthwillcomefrom
§ LawndaleispushingfordevelopmentofproductsbeyondAIRCATlinesandincreasingdistributionchannels
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II. Industry analysis
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Global tools market
Industry Analysis
Growth
1. Powertoolsareoutpacinghand tools2. Globalvolumeofconstruction is
expectedtogrow~7%andreach$15trillionby2025drivenbyincreaseddemand fromdeveloping economies
3. Chinaaccountsfor80%ofallpowertoolsproduced
4. U.S.,China,andIndiaaccountfor~60%ofglobal toolsmarket
ElkingtonIndustry Analysis
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Growth of hand tools marketIndustry trends
Source: FMI
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III. Company research
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ElkingtonCompany research
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CompanyBusiness overview
Performance Management
Acquisitions
Richard Horowitz Chairman, President & CEO
Joseph Molino COO & CFORichard Goodman General Counsel
P&FIndustriesoperatestwowholly-ownedsubsidiaries,ContinentalToolGroupInc.andCountrywideHardware,Inc.P&Fisamanufacturerandimporterofair-poweredtools.ItalsoownsFloridaPneumaticandHy-Tech,whichsellpneumatictoolsforprivatelabelcustomers
Year Company Price Reason
2007 Hy-Tech $16.9millionincash
Increaseproductoffering
2014 AirToolServiceCompany
$7.65 million incash
Boost Hy-Tech’sproduct line
2014 ExhaustTechnologies
$10.37 million incash
ObtainAIRCATproduct
2014 UniversalAirToolCo
$1.95millionincash
GainaccesstoEurope
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Overview of P&F’s operational structure
ElkingtonCompany research
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P&F: Florida Pneumatic
§ FloridaPneumaticimportsormanufacturesapproximately50typesofpneumatichandtoolsunderthenames"FloridaPneumatic","UniversalTool"and"Fuji",aswellasforotherprivatelabelcustomers
§ Pneumatictoolsaresimilartoelectrichandtools,butarepoweredbycompressedair,ratherthanbyelectricity,andaregenerallylessexpensivetooperate,lighterinweightandmorepowerfulthantheirelectriccounterparts
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P&F: Hy-Tech
§ Hy-Techmanufacturesanddistributespneumatictoolsandpartsforindustrialapplications
§ Hy-Techmanufacturesapproximatelysixtytypesofindustrialpneumatictools,mostofwhicharesoldatpricesrangingfrom$300to$7,000,underthenames"ATP","Thaxton","THOR"and"Eureka”aswellasunderthenamesforprivatelabelcustomers
§ Thelineofproductsincludesgrinders,drills,saws,impactwrenchesandpavementbreakerspoweredbycompressedair
§ Hy-Tech'sproductsaresoldtodistributorsandprivatelabelcustomersthroughin-housesalespersonnelandmanufacturers'representatives.
§ Customersincluderefineries,chemicalplants,powergenerationfacilities,theheavyconstructionindustry,oilandminingcompaniesandheavyindustry
Portfolio of Product Lines
§ Hy-Tech’sATP,Thaxton,THORandEurekabrands§ FloridaPneumatic’s FP,Fuji,andUniversalbrands§ PartnershipwithSears’Craftsmanbrand§ ContinentalToolandCountrywideportfolioof
productsandservices
Improved revenue growth and operational synergies
Thesis
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IV. Risks
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ElkingtonRisks
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Risks
§ P&Fisstillhighlyexposedtodecliningoil&gasmarket§ P&Foffers~75%-80%ofproductsrequiredforaerospacemarketthat
maynotbecompetitiveenough§ LargercompetitorssuchasIngersollRand,AtlasCopco ,andJPTools
havethescaletoundercutonprice§ Internationalexpansionmaynotworkwithoutmorefocuson
productqualityanddevelopment
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V. Macroeconomic trends
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ElkingtonMacroeconomictrends
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Bank credit and M2 growth
Source: Deutsche Bank, PBoC
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Debt and EBITDA growth diverging
Source: Societe Generale
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Market valuations are creeping upwards
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Market stability not being helping by increase in margin
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Corporate profits may have already hit a ceiling
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Buffett Indicators signals overpriced market
ElkingtonMacroeconomictrends
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Fossil Fuels will still be part of energy portfolio
Source: BNEF
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VI. Valuation
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ElkingtonValuation
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Comparable companies
Company (asof5/20/2016)
SharePrice ($) MarketCap($B)
Enterprisevalue ($B)
Rev.Growth% Current P/E ForwardP/E EV/EBITDA EV/Revenue PEGRatio
GHM 18.42 177.31M 112.84M -40.50% 30.20 42.84 12.37 1.25 4.27SWK 112.94 16.74B 20.97B 1.60% 18.68 16.09 11.80 1.87 1.80SNA 155.90 8.81B 9.84B 1.70% 18.58 15.61 11.47 2.73 1.78QEPC 16.50 53.23M 72.87M 8.20% 13.41 N/A 5.88 0.24 N/AATLKY 25.04 22.00B 31.69B -6.50% 21.87 N/A 11.19 2.56 N/AMean 65.76 9.56B 12.54B -35.5% 20.55 24.85 10.54 1.73 2.62Median 25.04 8.81B 9.84B 1.60% 18.68 15.61 11.47 1.87 1.78High 155.90 22.00B 31.69B 8.20% 30.20 42.84 12.37 2.73 4.27Low 16.50 53.23M 72.87M -40.50% 13.41 15.61 5.88 0.24 1.78P&F 9.13 32.80M 32.05M -0.40% 12.18 15 3.73 0.39 0.3
Source: SEC Filings
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Comparable companies cont.
§ Among it’s peers, P&F trades at a severe discount across every important statistic
§ This discount is not justified due to the company’s product power, change of capital structure, and long term earnings power
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Discounted Cash Flow Analysis
Source: PFIN SEC Filings
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Discounted Cash Flow Analysis cont.
Source: PFIN SEC Filings
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Discounted Cash Flow Analysis Cont.
Valuation Sensitivity
Source: PFIN SEC Filings
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Discounted Cash Flow Analysis Cont.
Source: SEC Filings
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Discounted Cash Flow Analysis Cont.
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Technical Analysis
PFIN is trading above its 200 day EMA signaling long-term price strength
ElkingtonValuation
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Debt Analysis
Source: Morningstar
§ PFINhasrecentlypaidoffmostofitsdebtproviding acompanythatwillberelativelymorestableinarising interestrateenvironment
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Catalysts
1. AndrewShapirofromLawndaleCapitalManagement hasbeenmanagementalignedwiththegoalsofunlockedP&F’sintrinsicvalue
2. InternationalgrowthinEuropeaswellasinCanadawithHomeDepotshouldcontributetorevenuegrowth
3. PotentialsalesfromCraftsmanbrandbecomingavailableoutsideofSearsshouldactasanotherdistributionchannel
4. PotentialpartnershipswithHomeDepotencouragedbyLawndale5. Companyhaslittledebtandshouldbeabletoweathermacroeconomic
cycle6. Oil&gasmarketmayhavebottomedoutandP&Fshouldbeabletoseea
benefitofarecovery7. Canremaincompetitivewithlargercorporationsaslongasproduct
development isfocusedon8. SaleofNationwidehasalloweddebttocomeoffbalancesheet
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Price target
Base: $19.90§ Aligned with historical revenue growth§ 7% gross margin; in line with historical margins§ 12x exit multiple, implying 3.0% perpetual growth Best: $24.89§ High revenue growth§ 8% gross margin; slight improvement from historical margins§ 15x exit multiple, implying 5.0% perpetual growth Worst: $15.91§ No revenue growth§ 5% gross margin; in line with historical margins § 9-10x exit multiple, implying 1-2% perpetual growth
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VII. Conclusion
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Conclusion
Conclusion
OperationalGrowth:-Growthopportunities inEuropeandCanada-Expansionofproduct lines
FinancialDiscipline:-Lawndaleshould beabletokeepcompanyandstraightandnarrow
AcquisitionOpportunities:-Withlittledebt,companyisinapositiontofinddealsthatwillsynergizewithexistingproductlines
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