WHITEFISH, MT / July 23, 2014 / Sterling Consolidated Corp. (OTC: STCC) has been supplying hydraulic and
pneumatic seals to the automotive and industrial marketplace for the
past 40 years. Leveraging its logistical expertise and experienced
management team, the company intends to consolidate small- and
medium-sized businesses within the highly fragmented, multi-billion
dollar industry to unlock value for shareholders. The biggest player in
the industry is Parker Hannifin Corp. (NYSE: PH), but there is plenty of
room left for regional growth.
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