In FY 2013, the company reported revenues that increased 5.7% to $6,185,148, gross profit that increased 12.3% to $2,142,815, and a net loss of $97,794. Management attributed the top-line growth to its acquisition of Superior Seal during Q3 2013 and the increase in gross profits to the jump in top-line sales and decreased prices of rubber products throughout the industry.
Ongoing Expansion
Sterling Consolidated announced its second acquisition of R.G. Sales Inc. in April 2014, a 20-year old distributor of O-rings, retainer rings, lock nuts, and springs to the oil and gas industry in western Pennsylvania. Management expects the acquisition to add approximately $700,000 to $800,000 in annual revenue to the company’s top-line, as well as improve the firm’s overall profit margins.
"The expansion into Western Pennsylvania allows us to increase our market share in the oil and gas sector," said Sterling Consolidated CEO Darren DeRosa in the press release announcing the acquisition. "Many of these seals are sourced locally and it is advantageous to have a local footprint … we look forward to increasing shareholder value by continuing to execute our plan on strategic acquisitions."
In general, management targets acquisitions that are generating under $5 million in revenue with 40% gross margins and at least 8-10% net margins. The company aims to make these acquisitions at a 3.5x EBITDA multiple, which enables a relatively quick payback period, particularly when accounting for fixed cost-related synergies between the parent and acquired companies.
Click here to receive free updates on Sterling Consolidated Corp. developments: http://www.tdmfinancial.com/emailassets/stcc/stcc_landing.php
Signs of Profitability
Sterling Consolidated reported first quarter revenue that increased 5.4% to $1.7 million, gross profit that increased 3.7% to $604,843, and net income of $85,862. By increasing its profit margins via the R.G. Sales Inc. acquisition, management has transitioned the company to profitability. Full year profitability remains to be seen, but the early signs are definitively positive for shareholders.
"The first quarter was successful as we increased revenues, improved our gross margins, and proceeded with another acquisition," said DeRosa in the company’s Q2 earnings press release. "We believe that the acquisition of R.G. Sales Inc. on April 1, 2014 allows us to work towards [consolidating a highly fragmented O-ring distributor market] … we hope to close additional acquisitions [in the future]."
The strategy and potential is similar to that of Diploma plc’s (LON: DPLM) (OTC: DPMAY) Hercules Sealing Products, which focused on companies in the $10 million to $25 million range, paying as much as 10x EBITDA to make acquisitions. Hercules generates about $225 million in revenue today and was recently acquired by the British holding company, yielding a windfall for its early investors.
Modeling the Future
Sterling Consolidated’s transition to profitability and ongoing roll-up acquisition strategy could unlock significant long-term value for shareholders. By leveraging economies of scale, management should be able to cost-effectively make profitable acquisitions that have near-term payback periods. These dynamics could set the stage for a much larger company over the coming years.
Management is on track to reach $7 million revenue in FY 2014, and plans to hit $25 million over the next couple years, through its aggressive acquisition strategy. Assuming those numbers at 35% gross margins and 5% net margins, shareholders could see short-term earnings per share in the $0.008 range this year and long-term earnings per share in the $0.025 range with 50 million shares outstanding.
Potentially Undervalued
Sterling Consolidated could be significantly undervalued if management proves capable of executing on its roll-up strategy. With the above estimates accounting for just one acquisition per year, increasing that number could lead to significantly greater revenue potential over the next five years. Economies of scale could help these acquisitions become even more profitable as they are made, too.
If management maintains its net income from Q1 over the next three quarters, the company could see FY 2014 EPS of about $0.01, which implies a price-earnings ratio of just 7x earnings. A “fair value” price-earnings to growth ratio of 1.0x would imply that the market estimates just 7% long-term growth rates. Management’s success in growing its top- and bottom-line could move these multiples significantly higher.
Disclaimer:
Except for the historical information presented herein, matters discussed in this release contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Emerging Growth LLC is not registered with any financial or securities regulatory authority, and does not provide nor claims to provide investment advice or recommendations to readers of this release. Emerging Growth LLC may from time to time have a position in the securities mentioned herein and may increase or decrease such positions without notice. For making specific investment decisions, readers should seek their own advice. Emerging Growth LLC may be compensated for its services in the form of cash-based compensation or equity securities in the companies it writes about, or a combination of the two. For full disclosure please visit: http://secfilings.com/Disclaimer.aspx
SOURCE: Emerging Growth LLC