CA - Unveiling Hidden Value: AirBoss Of America's Strategic Turnaround And Market Potential

2023-12-26 22:01:23 ET

Summary

• AirBoss of America Corp. appears undervalued with a market capitalization of $102 million.
• The company has shown resilience and adaptability, with improved profitability and strategic recovery from past challenges.
• AirBoss is well-positioned to capitalize on the growing trend of onshoring critical manufacturing in the defense sector.

AirBoss of America Corp. ([[ABSSF]], [[BOS:CA]]), with a market capitalization of $102 million as of December 22, 2023, appears undervalued. The Q3 2023 data reflects the company's strategic adaptability to pivot from a challenging period, improved profitability, and ongoing commitment to growth and efficiency, which shows a trajectory of resilience and potential underestimation by the market.

Introduction:

AirBoss of America Corp. is a company engaged in the production of rubber-based products serving various sectors. It operates primarily through three segments: AirBoss Rubber Solutions ((ARS)), AirBoss Defense Group ((ADG)), and AirBoss Engineered Products ((AEP)). ARS provides custom rubber compounding solutions for a range of industrial applications. ADG offers protective equipment and solutions tailored to the defense, first responder, and healthcare sectors. Meanwhile, AEP specializes in delivering anti-vibration components and other engineered products mainly to the automotive industry. Headquartered in North America, AirBoss aims to meet the diverse and specific needs of its clients through a focus on technology and production capabilities.

The formation of the AirBoss Defense Group in early 2020 was a significant strategic move for AirBoss, aimed at creating a stronger entity focused on integrated protective solutions for the defense, first responder, and healthcare markets. However, this venture also came with substantial resource commitments. The initial investment and ongoing operational costs of building and maintaining the Defense Group put a considerable strain on AirBoss' resources. Additionally, the timing coincided with the global pandemic, which led to increased demand for personal protective equipment along with other products offered by ADG. Throughout 2020 and 2021, ADG reported signing various large government contracts across the globe for its products drawing attention. For example, in March 2021, AirBoss announced signing of a new contract with U.S. Federal Government worth up to $576 million. This contract alone is more than AirBoss' annual revenue. This initially fueled investor optimism, anticipating that the new group would capitalize on the unprecedented market demand.

Historically, AirBoss' base of shareholders has been fairly small with minimal churn. The monthly trading volume on average in 2019 prior to the pandemic was just under 300,000 shares. With insiders owning over 40% of shares, the low trading volume has traditionally put AirBoss well under the radar for retail investors. However, with this extreme optimism, trading volume peaked at 6 million in March 2021 as a result of the news around the $576 million contract with average monthly volume consistently exceeding 2 million starting March 2020, pushing AirBoss' share price to as high as $46.2 per share compared to just around $8 per share prior to the pandemic.

However, as the urgency of the pandemic subsided and the market for products like nitrile gloves became oversaturated, the expectations began to overshadow the reality of the situation. The subsequent downturn in demand led to an inventory writedown, reflecting the challenges in balancing the new group's growth prospects against its resource allocation and market realities. For example, the previously announced sale of $576 million contract to U.S. Federal Government was revised to just $237 million as the follow-up purchase of $288 million was not executed. This situation highlighted the complexities and risks involved in expanding into new, highly volatile markets and the impact of investor expectations on the company's financial health.

In 2022, AirBoss indicated some delays in fulfilling those large contracts announced and eventually wrote down $57 million of its nitrile glove inventory. This writedown impacted AirBoss' financial situation by reducing its reported assets and earnings for the period, reflecting the challenges in the market and the need for adjustments in its inventory strategy.

As such, the market appears to show an excess pessimism and lack of interest in AirBoss' stock. It is not the first time that AirBoss was embraced with such extreme optimism and was hit later with extreme pessimism. In July 2015, AirBoss' share price was pushed to the peak of $24 per share from just about $5 in July 2013. This type of situation tends to take place in an extreme fashion for companies with low trading volume. However, the current extreme pessimism presents an opportunity for long-term investors as the business is well adapted from the challenges and back on track, and is much better business compared to 2019, but with a much lower valuation.

The current geopolitical landscape, marked by heightened uncertainties and a growing trend toward onshoring critical manufacturing, particularly in the defense sector, positions AirBoss of America Corp. favorably for long-term benefits. As nations, especially the United States, increasingly prioritize national security and supply chain resilience, there's a strategic push to bring the production of core defense products back domestically. AirBoss, with its established presence in protective equipment and solutions through its Defense Group, stands to capitalize on this shift. The company's North American base, combined with its expertise in specialized, high-demand products like personal protective equipment and survivability solutions, aligns well with the government and defense industry's objectives to secure and strengthen local manufacturing capabilities. This environment, coupled with ongoing global tensions, is likely to result in sustained or increased defense spending, from which AirBoss can derive long-term contracts and stable revenue streams, enhancing its market position and financial stability.

Operational Efficiency and Strategic Positioning :

The company continued to focus on adjusting operational performance and capturing new growth opportunities. Notably, in Q3, consolidated sales were $102.2 million. Although a slight decrease from Q3 2022's $104.7 million, the gross profit for Q3 2023 was substantially higher at $13.8 million compared to Q3 2023's negative gross profit of $47 million. The nine-month period, including Q3 2023, generated $31.6 million in cash from operations while the comparative period in 2022 used $38.6 million cash from operations mainly due to manufacturing the large nitrile glove inventory that was then written down.

These figures are indicative of a successful pivot from the challenged period back to a self-sustaining business machine with improved efficiency and strategic cost management.

Financial Health and Performance :

The company reported a free cash flow of $6.6 million and $26.4 million in Q3 2023 and in the nine-month period respectively and reduced its net debt by $4.3 million. This positive result of free cash flow is higher than the level in 2018 and 2019 prior to this roller-coaster period from 2020 to 2022. This performance, especially when compared to Q3 2022's free cash flow of negative $18.5 million, demonstrates a consistent focus on financial health and debt management. At current valuation of $102 million, if AirBoss manages to generate another $6 million in free cash flow in Q4 2023, it implies a multiple of 3.2 over free cash flow, which is very conservative for an established business with growth prospects. Overall, AirBoss is in a healthy financial position with over $100 million in liquid assets (current assets minus current liabilities). With access to $250 million credit facility, positive free cash flow, and the imminent decrease in interest rate, AirBoss is expected to have stronger balance sheet position in the near future.

Segment-Specific Insights and Market Challenges :

• Rubber Solutions ((ARS)) : ARS saw a 9.1% decrease in volumes in Q3 compared to 2022, with sales decreasing by 12.9% to $51 million. This is in line with the 8.5% decrease in sales in Q2. Despite this, Q3's gross profit as a percentage of sales improved to 15% from 14.3%, showing enhanced margin contributions.
• Engineered Products ((AEP)) : AEP continued to show strong performance with a 28.5% increase in net sales to $37.5 million in Q3, demonstrating its ability to mitigate broader market challenges. This is a continuation of the positive trend from Q2, where there was a 40.3% increase to $37.7 million.
• AirBoss Defense Group ((ADG)) : ADG's sales decreased by 10% in Q3 to $21.2 million but managed to increase its gross profit to $2.6 million. The strategic cost-saving measures implemented are expected to result in approximately $5 million in annual cost reductions, reflecting a proactive approach to market challenges.

Growth Initiatives and Future Outlook :

The ongoing investments and strategic reviews conducted by AirBoss, particularly in its Research and Development (R&D) sector, play a crucial role in its long-term growth and adaptability. For instance, in ARS segment, the company has been focusing on developing advanced rubber compounds that offer superior performance in extreme conditions with higher margins. For example, the acquisition of Ace Elastomer significantly accelerated ARS’ strategy to expand from traditional black, high-volume product lines into lower-volume but typically higher-margin color and specialty markets.

In ADG, R&D efforts have been directed toward enhancing the protective capabilities of their products. This includes developing advanced materials for chemical, biological, radiological, and nuclear ((CBRN)) protective gloves and suits, offering higher levels of safety and comfort for military and first responders. The innovation extends to creating more efficient and user-friendly decontamination solutions and respiratory protection systems, ensuring they are at the forefront of defense technology.

For AEP division, R&D initiatives focus on developing new anti-vibration and noise reduction solutions for the automotive industry, especially as the industry shifts towards electric vehicles with a 2035 mandate in Canada to the sale of new gas-powered cars. This could involve creating materials that are lighter, more durable, and better at absorbing vibrations, catering to the unique needs of electric vehicle manufacturing.

These examples of R&D efforts demonstrate AirBoss' strategic positioning to market trends and customer needs. By continually investing in R&D, AirBoss remains competitive to capitalize on emerging opportunities, thus adding substantial value to the company in the long run.

Risk Factors:

Market Sensitivity: AirBoss operates in industries that are sensitive to economic cycles and commodity prices (rubber). The current downturn in electric vehicles can lead to reduced demand for its products. This sensitivity may result in fluctuations in revenue and profitability.

Global Supply Chain Disruptions: Given the global nature of its supply chains such as AirBoss imports rubber from Brazil and China , disruptions can impact the availability and the cost of raw materials. Issues such as trade tensions, pandemics, or logistics bottlenecks can lead to increased costs and delays, impacting AirBoss' ability to meet demand efficiently.

Debt Management: While AirBoss has a credit facility and has shown improved financial health, managing its debt levels and maintaining liquidity is crucial. An inability to manage debt or a sudden increase in borrowing costs can strain financial resources.

Conclusion:

AirBoss, with its current market capitalization of $102 million, appears undervalued amid extreme pessimism, especially when considering its Q3 2023 performance and strategic recovery from past challenges. The company's significant increase in gross profit, coupled with positive cash flow generation, underscores a commendable turnaround. Despite earlier setbacks, like the writedown of nitrile glove inventory and the initial resource strain from forming the AirBoss Defense Group, AirBoss has demonstrated resilience and adaptability. Its focused investments in R&D and favorable positioning in the face of geopolitical shifts towards onshoring suggest a promising trajectory. Thus, while considering certain risk factors, AirBoss stands as a potentially undervalued entity, poised to realize its intrinsic value amidst a market prone to short-term perspectives.

For further details see: