ACU
Our last investor challenge asked subscribers to identify a stock screening strategy that interests them using the Screen Power Rankings and submit their analysis of a stock passing that strategy.
S.T.P. from Grayling, Michigan, was kind enough to allow us to republish his analysis of Acme United Corp. (ACU) and how he came upon it. The following is his narrative, which has been edited for length and clarity.
With everything that is going on in the markets right now, I am laser-focused on risk. When evaluating the different AAII stock screens, I like to rank them by their long-term, risk-adjusted return. [Editor’s note: As of March 31, the top three AAII stock screens, ranked by their risk-adjusted annualized return are: Stock Market Winners, Estimate Revisions Up 5% and Estimate Revisions Top 30 Up.]
Acme United was passing two of the top-five AAII screens in terms of risk-adjusted return: Stock Market Winners and O’Shaughnessy’s Tiny Titans. I am intrigued by both approaches, so finding a stock passing both of them was a pleasant surprise. The Stock Market Winners screen is, in my opinion, a value-oriented CAN SLIM screen. I like the combination of low price-to-book ratio along with accelerating quarterly earnings, positive long-term earnings growth and strong price momentum. If I invest in individual stocks, I gravitate toward smaller issues. O’Shaughnessy’s Tiny Titans have a market capitalization of less than $250 millionand a low price-to-sales ratio and are exhibiting above-average price momentum.
This is the description from Acme United’s investor relations page:
“Acme United Corporation was organized as a partnership in 1867 and incorporated in 1882 under the laws of the State of Connecticut. The company is a leading worldwide supplier of innovative cutting, measuring and safety products to the school, home, office, hardware and industrial markets. The company’s operations are in the United States, Canada, Europe (located in Germany) and Asia (located in Hong Kong and China). The company aims to be the leading supplier of cutting, measuring and safety products to businesses, schools and homes worldwide; to be known for quality and innovation in all the categories in which it participates; and to enter new categories, with innovation that surpasses the competition.”
Seeing that health care is in focus during the coronavirus pandemic, I figure a company like Acme United would stand to benefit.
I ran Acme United through the A+ Stock Grades. Growth rated only a C, mainly because of its negative operating cash flow growth for the last quarter. Acme United saw positive growth in its latest quarter for sales and earnings and has positive annualized five-year growth in sales, earnings and operating cash.
[Editor’s note: Acme United reported its first-quarter 2020 results on April 17. Sales were up 14% compared to the same quarter a year ago and GAAP diluted earnings per share were up 50% from a year ago. Acme United’s first-quarter earnings beat the consensus estimate from one analyst by 9.1%. Here are Acme United’s A+ Stock Grades as of the close on April 17:]
Acme United rated a B in value, momentum and EPS revisions and an A for quality. Given the current economic climate, high-quality stocks are especially attractive to me.
I also did some digging around the company’s investor relations website and found its investor presentation. According to the company, it has posted nine consecutive years of record sales and reduced its debt by 25% last year. That led me to look at its balance sheet, and the company’s ratio of total liabilities to total assets is 49.7% compared to 58.3% for the business support supplies industry.
Dividends are a way for me to purchase some downside protection and Acme United pays $0.48 a year in per-share dividends, which translates into a yield over 2%. Over the last five years, dividends, on average, have been increasing by 7.1% per year.
I think the recent market decline presents a buying opportunity for Acme United. Shares of the company hit an all-time high close of $24.35 on February 20 before falling by as much as 27%. [Editor’s note: Shares have rebounded 20% from the low close of $17.67 on March 18 to close at $21.27 on April 17.]
Any company that supplies retailers faces uncertainty in the coming quarters, depending on the long-term impact of the coronavirus pandemic on the global economy. Acme United admits that its sales of first aid and safety products and online revenues may not be sufficient to offset potential declines in its office product lines. There is also the potential for the coronavirus to burn out, which would prompt the demand for Acme’s goods to fall from recent high levels. This uncertainty led management to withhold financial guidance for 2020.
That being said, I think Acme United offers an intriguing mix of product demand, low valuation, recent positive earnings surprise and strong year-over-year growth to warrant further investigation.
My thanks to S.T.P. for sharing his analysis. If you didn’t have a chance to submit your entry for this investor challenge, feel free to send it along to us at aplus@aaii.com.
