P & F Industries, Inc. – Q4 2016

Q4 2016 – 6,95 $– NASDAQ:PFIN

1kr50öreP&F Industries, Inc. conducts business through its subsidiaries. The Company operates through two segments: tools and other products (Tools), and hardware and accessories (Hardware). It conducts Tools business through a subsidiary, Continental Tool Group, Inc. (Continental), which in turn operates through its subsidiaries, Florida Pneumatic Manufacturing Corporation (Florida Pneumatic) and Hy-Tech Machine, Inc. (Hy-Tech). Florida Pneumatic imports and sells pneumatic hand tools, most of which are of its own design, primarily to the retail, industrial and automotive markets. It conducts the Hardware business through its subsidiary, Countrywide Hardware, Inc. (Countrywide). Countrywide conducts its business operations through its subsidiary, Nationwide Industries, Inc. (Nationwide). Nationwide develops, imports and manufactures fencing hardware, patio products, and door and window accessories, such as rollers, hinges, window operators, sash locks, custom zinc castings and door closers. – Google Finance.

1. The company is currently a net-net with an adequate margin of safety: 

  • P/NCAV < 1x
    • 0,89x ✓ 
      • MoS = 11 %
    • 0,91x (incl. operating leases).

Assessment of margin of safety:

P & F Industries is an American nano-cap company that was incorporated in 1963 and that up until recently had two business segments, tools and hardware. In 2016 it was announced that the company’s Hardware subsidiary Nationwide Industries had been sold for 22,2M $ as well as its real estate property for 3,8M $. The proceeds from the sale was used to pay down almost all of the company’s debt, initiate a quarterly dividend policy of 0,05 $ per share and to pay a one-time special dividend of 0,50 $ per share. Finally, this Thursday it was announced that the company had acquired Jiffy Air Tool, Inc. for 7M $ (another 1M $ is entitled to the seller if certain profitability thresholds are met). Note that I initiated my position before this acquisition was announced and that the figures I present below are not adjusted for this transaction.

Besides the fact that P & F Industries makes it through my checklist there are four other factors that in my opinion makes the company at the current share price a good addition to a diversified portfolio of net-nets:

1. I would argue that even though the absolute level of NCAV margin of safety is only 11 % it is good enough considering that the burn rate is positive for both QoQ and YoY, i.e. the NCAV margin of safety has been growing.

2. Regarding historical profitability. In the picture below I have tried to demonstrate the company’s historical profitability as if Tool was P & F Industries sole business segment. Note that the ‘Adjustment Hardware general corporate expenses‘ is only correct for the 2015 numbers since I haven’t managed to find earlier years figures. However, I have used the same figure for earlier years to get some sense of the historical profitability. As can be observed in the picture the company has on a Tool business level alone been profitable for most years during the las ten year period. Based on the consistency and the fact that the company today is selling below liquidation value this must be a true oxymoron. Or is it?
operating income pfinIf we put the current enterprise value in relation to the average operating income for the last five and ten years that gives us multiples of 15x (5y) and 22x (10y). In other words, the company is not on a Tool’s operating income level what I usually consider cheap. Also, in P & F Industries Q4 conference call it was announced that they have chosen not to renew their Sears agreement which will result in a loss of 1M $ EBITDA going forward. However, in this context it should be noted that the recent announced acquisition of Jiffy Air Tool will probably help the situation a bit. To what degree I don’t know but I note the following positive sentence from the acquisition announcement: “We anticipate that this acquisition will be immediately accretive to earnings.

3. Regarding ownership structure. Insiders definitely have skin in the game when it comes to P & F Industries as they together own 39,7 % of the company. The CEO, Richard. A Horowitz, alone owns 36,1 %. Also, in relation to his total compensation (1,5M $) it seems that the CEO eats his own cooking as his stake in the company is currently worth ~6,x that amount (9,5M $). However, a total compensation of 1,5M $ annually for a CEO of a 25M $ company can also be questioned. One large shareholder (12,9 %) that has addressed the problem with compensation and that also keeps pushing for more shareholder friendly actions such as buyback programs is the activist Lawndale Capital Management (Andrew Shapiro)For those of you that have read my earlier analyses will know that I like having an activist investor involved in the company’s that I invest in.

4. Regarding hidden real estate value. In their latest 13D Lawndale also make an interesting note: “Lawndale believes the public market value of PFIN is undervalued by not adequately reflecting the value of P&F’s business segments and other assets, including certain long-held real estate.” On this note I conclude that the company owns’ a 72,000 square foot plant facility located in Jupiter, Florida and a 51,000 square foot plant facility located in Cranberry Township, Pennsylvania that together is valued at 5M $ on the company’s balance sheet. Also, the company has 1,6M $ worth of land on its books. This is interesting since their 56,250 square foot plant facility located in Tampa was just sold for 3,8M $. Therefore, I finally would argue that the P/TB multiple for P & F Industries of 0,67x shows a better picture of the current margin of safety in the company then what can be observed from a strict net-net point of view.

2. The risk of permanent loss is low:

2.1 The risk of bankruptcy is low (criterion a) or b) must be met):

a)

  • Debt/Equity < 25 %
    • 0,2 % 

b)

  • Z-score ≥ 3
    • 4,9 

2.2 The company’s business model has historically been profitable (criterion a) or b) must be met):

a)

  • Positive retained earnings:
    • 36M $ 

b)

  • Positive aggregate operating income for the last ten years:
    •   9,9M $ 

3. The company does not have a shareholder unfriendly capital allocation:

  • Shareholder yield TTM ≥ -2 %
    • Dividend yield TTM = 9 %
    • Net buyback yield TTM = 1 %
      • =  10 % 

MoS

Disclosure: The author is long NASDAQ:PFIN when this analysis is published. Also note that NASDAQ:PFIN is a nano-cap stock (25M $ in market capitalization). The trading is illiquid.