The company reported diluted EPS of $0.24 per share, up from $0.21 a year ago. Sales declined 1% to $31.4 million due mostly to a non-repeat of a large order from a distributor who was launching a first aid kit program in last year’s quarter. On a constant currency basis, sales were flat.
The gain in net income came mostly from cost cutting. Acme’s SG&A expenses declined by about $500,000 or as a percent of sales from 33.9% to 32.7%, which more than offset the decline in gross profit of about $324,000. Management said that it was on track to achieve its goal of a $2 million expense reduction in 2019.
EBITDA increased from $2.14 million to $2.35 million, while estimated capital expenditures dropped from about $900,000 to only $380,000. Even so, a $2.1 million reduction in working capital produced negative free cash flow of about $800,000, according to my estimates. (Full financial statements will be available on or about May 10.) After estimated dividends of $400,000 offset by increased borrowings of about $700,000, Acme’s cash balance declined by about $600,000.
Management reaffirmed its 2019 guidance of $140-$143 million of sales, $5.0-$5.3 million of net income and EPS of $1.41-$1.50. After raising the dividend by another penny per quarter, the dividend yield is now a solid 2.2%. At the current price of $22.00, the stock is now valued at 15.1 times forward earnings, based upon the midpoint of management’s guidance. Management’s guidance implies revenue and profit growth of about 4% for the balance of the year and 10% EPS growth, due to a reduction in the share count.
Although the stock still trades at a modest discount to the broader market averages, it has run up fast in a short period of time. Consequently, I believe that the market will want to see further confirmation that the company can achieve its 2019 revenue and earnings targets, with an eye toward further improvement in 2020, before the stock moves higher on a sustainable basis from here.
Stephen P. Percoco
Lark Research
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