Market Overview

Park-Ohio Holdings: Small Company, Big Profits

  • Price: $19.89
  • Forward P/E: 8.2
  • Earnings Growth: 74%
  • Projected Sales Growth: 12%
  • Market Cap: $235 million

Why It's Featured:

Strong demand for products; exceptional earnings growth; remarkable ROE.

Danger Zones:

Highly leveraged; sensitive to economic cycle.

Park-Ohio Holdings Corp. (NASDAQ: PKOH), through its subsidiaries, engages in the industrial supply chain logistics and diversified manufacturing business in the United States, Asia, Canada, Mexico, and Europe. The company operates in three segments: Supply Technologies, Aluminum Products, and Manufactured Products.

The Supply Technologies segment provides supply chain management services for specialty production components. It offers engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, electronic billing, and ongoing technical support services; and engineers and manufactures precision cold formed and cold extruded products, such as locknuts, SPAC nuts, and wheel hardware.

This segment serves OEMs in the heavy-duty truck, automotive and vehicle parts, electrical distribution and controls, consumer electronics, power sports/fitness equipment, recreational vehicles, HVAC, agricultural and construction equipment, semiconductor equipment, aerospace and defense, and appliance industries. It accounted for 49% of 2010 sales.

The Aluminum Products segment casts and machines aluminum engine, transmission, brake, suspension, and other components for automotive, agricultural and construction equipment, heavy-duty trucks, and marine equipment OEMs. It provides front engine covers, cooling modules, control arms, knuckles, pump housings, clutch retainers and pistons, master cylinders, pinion housings, oil pans, and flywheel spacers; and design engineering, machining, and part assembly services. This group made 18% of total sales in 2010.

The Manufactured Products segment offers engineered products, such as induction heating and melting systems, pipe threading systems, rubber products, and forged and machined products. This segment serves component manufacturers and OEMs in the ferrous and non-ferrous metals, silicon, coatings, forging, foundry, automotive, truck, construction equipment, and oil and gas industries. This division contributed 33% of total sales last year. The company was founded in 1961 and is based in Cleveland, Ohio.

Here's a company with revenues of $813 million in 2010 with 11.826 million shares outstanding, and earnings of $1.14. This year, those numbers, according to 2 analysts' consensus, should be $909.85 million (up 12%), same number of shares, and earnings of $1.98 (up 74%). For 2012, the numbers go higher: revenues to $998.27 million (up 9.7%), earnings to $2.45 (up 24%). While the sales may be relatively small, the earnings per share definitely are not.

Second quarter results were just released (July 27). Sales were up 24% to $246.8 million compared to the second quarter last year. Without extraordinary charges, earnings were 69 cents a share vs 29 cents last year in the second. However, the company refinanced its senior subordinated notes and amended its revolving credit facility which caused a one-time debt extinguishment cost of $7.3 million and a provision for income taxes of $2.1 million due to the retirement of senior subordinated notes. Combined, those charges created a second quarter net loss on a GAAP basis of $1.1 million or negative 10 cents a share. Most investors focus on the operating earnings. In this case, they were well above last year's totals.

Part of those impressive operating earnings came from heavy cost cutting management did in 2009 and 2010 when times were tough. Expenses are down notably. Investors noticed, bidding the stock higher by 20% in the last 3 months. Looking back, in early 2009, the stock traded at $1.70 a share. A little over 2 years later, it's up almost 1100%.

Getting its debt into better shape is important to its success. Debt was 78% of capital ($300 million) before the retirement. With lower interest payments and expenses, expect operating margins to widen as revenues ramp.

During the third quarter of 2010, Supply Technologies completed the acquisition of certain assets and assumed specific liabilities relating to the ACS business of Lawson Products, Inc. for $16.0 million in cash and a $2.2 million subordinated promissory note payable in equal quarterly installments over three years ($1.7 million outstanding at March 31, 2011). ACS is a provider of supply chain management solutions for a broad range of production components through its service centers throughout North America.

This acquisition was made at the right time and the right price because this company was in trouble. Currently, with ACS in the PKOH supply technologies group, revenues are ramping, giving Park-Ohio solid returns on its investment. Expect even more. Analysts see the purchase adding 10 cents to this year's earnings.

Essential numbers:

  • Trailing P/E is 11.
  • Price to sales ratio is .27.
  • Price to book is 4.01.
  • Book value is $4.91.
  • Operating margin for the last 12 months was 5.89% while Profit margin was 2.53%.
  • Return on equity was an impressive 53.82%.
  • Return on assets was 5.83%.
  • Total cash is $30.81 million for $2.61 a share.
  • Current ratio is 2.16.
  • Beta is 2.03.
  • In the last 52 weeks, the stock is up by 59.69%.
  • The Float is 8.29 million with Insiders owning 30.13% of the Outstanding stock (11.83 million).
  • Institutions have 43.60% of the Float.
  • There is no dividend.

Two statistics stand out in the above paragraph: Return on Equity of almost 54% is extremely high. Very few stocks show that kind of return. (In contrast, in 2009, the company lost 11 cents a share so ROE was you an idea of the volatility this stock provides). The other stat: insiders own 30% of the stock. That's always a good sign. There's no question that their wealth depends, as does every investor's, on the stock going up.

- Company Web site:

- Ted Allrich July 28, 2011

Ted is the Chairman of the Board of B of I Holding and Bank of Internet USA. He is also the founder of The Online Investor ( which has a Free Newsletter for investors.

Posted-In: Earnings Long Ideas News Short Ideas Small Cap Analysis Movers & Shakers Movers Trading Ideas


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