Alberta manufacturing stock profits from low oil prices

PFB Corp. earned much more in 2015 and is expected to earn more this year and next. Its solid balance sheet and cash flow is enabling it to expand. This manufacturing stock remains a buy for long-term share price gains and attractive dividends.

Calgary-based Key stock PFB Corp. (TSX─PFB) did much better in 2015. It’s expected to earn more this year and next. The company continues to pay attractive dividends. It also pays special dividends from time to time. With a solid balance sheet and excess cash flow, we expect PFB to grow. It’s an attractively-priced value investor’s stock. The shares remain a buy for long-term price gains and attractive dividends.

PFB’s main business is manufacturing insulating building products. They’re made in Canada from expanded polystyrene materials. The company markets these products in North America.

In 2015, PFB earned $5.1 million, or 76 cents a share. This was up sharply from earnings of $0.9 million, or 14 cents a share, a year earlier. That’s because sales growth outpaced the growth of the costs.

PFB is a rarity—it profits from lower oil

Chief executive officer C. Alan Smith said, “Strong operating results throughout the past year reflect improved gross [profit] margins resulting from lower raw material costs and increased sales volumes.” PFB is one of few Alberta-based businesses that profit from lower oil prices.

In 2015, PFB’s sales climbed by 10.3 per cent, to $99.1 million. The cost of sales, however, inched up by only 2.8 per cent. That’s thanks to lower feedstock costs. All of the company’s operating and finance costs as a group increased by only four per cent. With sales rising more than costs, its earnings jumped, of course. Partly offsetting this improvement was a sharp rise in PFB’s income tax bill. PFB’s profit margin may expand. Mr. Smith said, “We continue to focus on operating efficiencies.”

Mr. Smith said, “The acquisition of the molding facility near Minneapolis on December 15, 2015 is part of our USA expansion strategy. A strong and liquid balance sheet will continue to support our future growth plans.” In 2015, PFB’s U.S. revenue advanced by nearly 26 per cent, to $26.3 million. That accounted for almost 27 per cent of PFB’s sales. With the acquisition of a molding facility, we expect its American revenues to continue to increase.

PFB holds cash of $16.3 million. It carries no debt, although it does face total lease obligations of $14.8 million. This shows that the company’s balance sheet is indeed strong and liquid.

We expect PFB’s balance sheet to stay that way. That’s thanks to its 2015 cash flow, which soared by 89 per cent, to $11.7 million. This exceeded net capital investment of $2.2 million, a business combination of $1.2 million, and dividend payments of $1.6 million. This left the company with excess cash flow of $6.6 million (we’ve rounded the numbers). This gives it the means to continue to grow and pay dividends.

PFB pays regular dividends of 24 cents a share. This yields an attractive 3.1 per cent. When it pays special dividends, the yield is even better.

PFB is a bargain basement stock to buy now

PFB Corp. is a bargain stock for value investors. In 2016, it’s expected to earn 85 cents a share. That represents earnings growth of 11.8 per cent. Based on this estimate, the shares trade at an attractively-low forward price-to-earnings, or P/E, ratio of only 9.2 times. Single digit P/E ratios show that this is a bargain stock.

Next year, PFB’s earnings are expected to jump by 17.6 per cent, to a dollar a share. Based on this estimate, the shares trade at an even better bargain stock hunter’s P/E ratio of 7.9 times.

PFB generated cash flow of $1.74 a share. This gives it an appealingly-low price-to-cash-flow ratio of only 4.5 times. That’s within the ratio of five times or less that we seek.

PFB also trades not much above its book value of $7.25 a share. This too, suggests the shares are truly a bargain stock for 2016.

 

The Investment Reporter, MPL Communications Inc.
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