www.globeandmail.com

The Globe and Mail
leaftheglobeandmail

  Seeking Alpha with a Little Alpha

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR

Tuesday July 11, 2017

During the 16-plus years that we have been writing this column, it has been rare that a company has been covered more than once, not counting the Year-In-Review. But this will be the third time up for Alpha Pro Tech and no question, this is one special stock. That logic extends far beyond the fact that this is a Canadian corporation with a head office just outside of Toronto that trades solely on an American exchange.

When first the subject of this column in June, 2012, this outfit was trading around $1.35 (U.S.), a bit above our purchase price of $1.17. Our concluding line was, "Though historical patterns are no guarantee of future success, there is a very reasonable chance that this company will jump past that target [$3.34] in the next few years, as it has a number of times over the past decade." It did exactly that when it spiked in October, 2014, to $10.73.

Around that time, on five days over two weeks, the stock traded more than the outstanding share count. (For example, on Oct. 10, 13, 14 and 15 of that year, it traded around 39 million, 38 million, 42 million and 22 million shares, respectively; its share count was about 18 million.) Alas, as swiftly as the stock price skied, it descended.

That was not the first time Alpha saw major spikes in the share price. In fact, it was a key reason why we bought it and why the enterprise is such an intriguing possible purchase now.

Effectively, the enterprise is divided into two main parts, building supplies and disposable protective apparel. The latter is the key to the short-term stock trajectory. When there is a scare such as H1N1, SARS or Ebola, the stock price typically leaps.

Last month, Benj and Phil MacKellar, a colleague who has been working with us for more than five years, went to the Alpha annual meeting. As happened to Benj in 2012 and Phil last year, we were the only people there who were not working for the company.

This allowed us once again to have face time with the powers that be: Alex Millar, the chairman and president, and Lloyd Hoffman, the chief executive. Mr. Millar has been with this business since it started in 1989, with Mr. Hoffman joining his father Shelly (a co-founder and former CEO) in 1991. This is a very experienced management team who have guided Alpha in good times and bad.

Back in the day, as Mr. Hoffman described it, "We had years where we had debt and no money and don't want to go back there." Mr. Millar added, "Debts are a killer." The problems faced in the past when survival was in doubt have made a major impression on how the company operates today. There is zero debt, accompanied by about $8-million in the kitty. Cash flow is regularly positive.

Currently, Mr. Hoffman says the major opportunity for the enterprise's potential growth is a "breathable" housewrap membrane - the weather-resistant barrier that sits between the siding and the wood of a house. The breathable-type membrane is the only kind used in Canada.

In the United States, non-breathable is used, but Alpha's goal is to make breathable more the norm. The potential market is huge and largely untapped. Alpha has doubled its sales force to six to expand in this realm.

The company is also exploring sales of protective apparel products in India, where it employs more than 1,000 people in four factories. That compares with 120 staff in North America. If the $36,000 feasibility study is positive, this country could prove to be another market.

One strategy that Alpha regularly deploys on a major scale is a share buyback. Since 2012, the share count is down from 22 million to about 15 million. As the shares are being purchased at a solid premium to book value, we suggested a dividend would be more worthwhile for shareholders. Mr. Millar, who happens to be the largest owner, is not keen on this idea.

Benj sold 58 per cent of his position on the last runup at $3.34 and waved goodbye to another 21 per cent at $6.96. With hindsight, which makes investing much easier, it would have been great to have waited to sell above $10 and exit the whole position.

Or at least everything at $6.96, given the current share price just above $3. Regrettably, that did not happen. Mr. Hoffman suggests the push into the breathable-membrane market could lead to a large revenue increase and move the share price to between $6 and $8 in the next few years.

The possibility of a major contagion scare could make the stock price soar much more quickly.


back