Access Plans, Inc (see initial writeup on APNC) reported solid second quarter results but the stock has been on a steady downtrend since the announcement.  With no news, this is the type of market volatility that investors must ignore and is a great time to pick up additional shares.

Overview

Overall, second quarter revenue increased by 128%, due primarily to the company’s acquisition of Access Plans USA in April 2009.  This acquisition significantly expanded the scope of APNC’s Retail Plans division and created an entirely new business segment – Insurance Marketing.

Division Breakdown

With three distinct segments, it is important to take a look at each individually:

The highlight of the earnings report was that the Wholesale Plans division contributed 15% organic growth and improved margins significantly across the board.  Representing 42% of the Company’s revenue, this division is the most mature of the business units.

On the Retail Plans side, the acquisition allowed the Company to almost double top-line revenue, but caused a slight hit to margins.  It will be important to keep an eye on these margin numbers to see if management can further streamline operations to return to pre-acquisition profitability.

The Insurance Marketing division runs a very tight ship, with average operating margins around 3% (1.35% for the 2nd quarter).  This division has no comparables available for 2009.  With the passage of the health care reform bill, the Company plans to transition their product mix towards association-based insurance products:

“…we are focusing our efforts on transitioning the Division’s mix from major medical insurance to emphasize more profitable supplemental insurance products.”

If there is a common theme among the business segments, it’s ‘associated-based’ products, so the Company should be comfortable making the transition.  If it occurs, the company should benefit from the higher margin offerings.

Other Financial Information

The Company has generated $2.12M in Owner’s Earnings during the first two quarters of the year, a 20% improvement over prior year numbers.  After paying off the final portion their $1M note payable, the Company has no long-term debt.   Tangible stockholder equity is positive and has steadily increased after several years with a negative balance.

Valuation

Based on the Company’s current stock price, the market is not pricing in any growth opportunity from the recent acquisition. With the most conservative estimates (0% growth, current owner’s earnings levels), APNC should be worth north of $1.70 per share.

Under modest growth assumptions, I calculate an intrinsic value between $2 and $2.50 per share.

Next quarter’s numbers will be the first to show relevant year-to-year comparisons on how APNC is shaping up as a combined entity.  I will be watching these numbers closely.

Disclosure

Long APNC

*Hat tip to OSV for the chart formatting.

Servotronics reported Q1 results two weeks ago, and the market certainly reacted favorably! Almost 44k shares traded hands – average volume is around 2k – and the stock jumped almost 30% during intraday trading before closing at $10.04, a 19.54% gain. The stock has dipped since then but it’s rising back towards $10.

Back in March, investors will remember that the stock took a 25% hit after reporting a large decrease in net income, as the Consumer Product division barely broke even for the year.  I certainly felt like the March drop was an overreaction and the company’s press release seemed to back up this sentiment:

Notwithstanding the reported reduction in year to year net income, the net income for 2009 was the 3rd highest net income reported by Servotronics during the past 25 years. Also, the 2009 reported net income was approximately 50% higher than the reported net income for the Company’s 4th best year during the same 25 year period. The Company’s 3 best years, as measured by net income during the past 25 years, occurred during the last 3 years (i.e., 2009, 2008 and 2007).

Q1 Financial Numbers

Total revenue increased by 4.6%, with a 13.2% increase in the Consumer Product division. Net income increased a staggering 397.6%, as margins improved across the board due to a better product mix. Although these are obviously very positive results, the company’s product mix constantly shifts from quarter to quarter, especially since a large percentage of sales come from governmental contracts, so it is important to keep these numbers in perspective.

Outlook

The most exciting part of this quarter is management’s cautiously optimistic report on the future of the aerospace industry. Several major aircraft manufacturers have announced plans to increase production in late 2010, 2011, and 2012. As a supplier of ‘servo-control components,’ a necessary part of airplane hydraulics, SVT is well positioned to capitalize on this growth.

I expect the company to continue to deliver impressive operating results as they ramp up production to meet this increased demand.

Valuation

I calculate an intrinsic value between $15 and $17 per share, providing substantial upside at the current price.

Disclosure

Long SVT

ELST filed its Q1 results on March 13th and reported a solid, if unspectacular, quarter. Total sales increased by 23% compared to the first quarter of 2009. Domestic sales were basically flat but foreign sales jumped almost 82%, due to higher demand for the company’s products from industrial automation projects in Chile, India, Colombia, and Peru. Operating margins are significantly higher on foreign sales – see chart below:

Foreign sales accounted for 34% of total sales in 2009, compared to 23% in the previous year. Hopefully management will continue to focus company sales efforts on this segment going forward.

Despite the improved results, management is still very cautious for the rest of 2010 –

“Management believes that the tenuous worldwide economic recovery makes sales revenues during 2010 difficult to predict and prone to potential fluctuation”

As a going concern, I think the business could be worth anywhere from $.75-$1 per share, substantially higher than the latest closing price. Barring a potential catalyst, it is very important to understand the downside risk as well:

Based on the company’s latest closing price of $0.45, the stock is trading for 10% less than the sum of its assets its liquidation value, providing a nice cushion to the downside.

Also, Paul Sonkin of Hummingbird Capital has increased his stake from to 16% to 21.1% of the company. Hummingbird Capital is a very successful hedge fund manager that focuses on nano-cap plays selling at a discount to their intrinsic value. Paul recently spoke at the Value Investing Congress (see a great writeup here: 2010 Value Investing Congress Notes by The Innoculated Investor)

It is always nice to have an expert on your side!

Disclosure

Long ELST