PLASTICS—Plan to Sell Plastics Firm Dashed By Terrorist Attacks

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Plans changed drastically after Sept. 11 for Summa Industries, the Torrance-based plastics manufacturer that’s been in business since 1942.

Summa’s board, believing its stock was undervalued, had placed the company up for sale, and was in the midst of discussions with several interested buyers.

After Sept. 11, the buyers disappeared almost immediately.

“Everybody got scared,” said Chairman and Chief Executive James R. Swartwout. Summa released its bankers on Sept. 26.

The good news is, Summa wasn’t desperate to sell. Its board was simply impatient with market dynamics that grant large companies higher valuations than small ones, due to the liquidity concerns of large institutional investors. These investors want stocks they can unload quickly without disrupting the balance of supply and demand.

“We feel there’s a permanent penalty for companies like ours,” Swartwout said. He added that Summa won’t be re-shopped anytime soon, even if market conditions improve. “It’s a pretty demanding process,” he said.

Summa’s trials aren’t uncommon for small companies, many of which are in the L.A. area. In recent years, market dynamics have shifted against companies with market capitalizations below $250 million. In addition to the primacy of institutional investors, consolidation on Wall Street which has concentrated research coverage on larger companies and larger dollar amounts being invested all work in favor of larger-capitalized companies.

“The discount applied to micro-cap companies is 10 percent to 30 percent of large-cap (valuations),” said Luis Martins, an equity analyst with Taglich Brothers Inc., a New York brokerage that specializes in micro-cap stocks.

A recent study by U.S. Bancorp Piper Jaffray found that small companies pursuing mergers with public companies or private buyouts since mid-2000 have achieved returns of 64 percent, compared with returns between 10 percent and 25 percent for firms that didn’t “evolve.”


No respect for the small

With its stock trading at a recent price of $8.53, Summa’s market value is about $37 million. This for a company that posted sales of $127 million for the year ended Aug. 31, and earnings of $4.4 million, or $1 a share, in a down year. (For the like year-earlier period, Summa earned $7.3 million, or $1.62 a share, on sales of $126 million.)

Summa’s price/earnings ratio, or its stock market value divided by annual earnings, is about 8.3 on par with some of its smaller peers, but much lower than larger companies such as Myers Industries Inc., of Akron, Ohio, another plastics company. Myers, with about four times Summa’s sales and similar levels of profitability (both companies have seen earnings decline in the past year), enjoys a P/E of about 15.

“I thought Summa was undervalued at $12 a share,” Martins said. (Taglich owns a negligible amount of Summa shares, Martins said.) Now, with slim prospects for a renewed deal and earnings most likely stifled until an economic recovery occurs, Martins rates the stock a hold.

With only 4.4 million shares outstanding, and a fair number of those in the hands of insiders, Summa’s public float is 3.2 million shares, Martins estimates. On average, 11,000 Summa shares trade daily, making its price highly volatile and subject to big swings when an event such as an earnings shortfall occurs.

On a recent day, Summa’s entire volume of 1,300 shares was taken up in six trades, all of which took place within one minute at the open. The price bounced around between $7.80 and $8.45, a spread of 65 cents. By way of comparison, Myers Industries’ stock varied only 20 cents the entire trading day, on volume of 20,000 shares.


Roll-up plan

Since 1993, Summa’s strategy has been to build the business by buying smaller, profitable companies who specialize in niche plastics-manufacturing markets.

Revenue has grown exponentially from $5 million in 1994, as Summa bought its way into specialized markets for plastic components used in agricultural irrigation, food-handling conveyor belts, lighting products and electronics products. Debt peaked at $50 million in December 2000, but it is now down to a respectable $36 million.

Last year, with the stock trading in the low teens, Summa’s board started looking for ways to bring a higher valuation to the company. It eventually settled on the sale plan, but as the process wore on, the economy turned sour.

“We were lulled into thinking it was a quarter or two, and we remained optimistic,” Swartwout said. Along the way, the company’s results suffered.

Same-business sales fell 20 percent, impacting the electronic components segment more than the others. The financing environment tightened as well.

It will probably get worse before it gets better. Because orders fell sharply in September, Summa has said it expects sales for the first quarter ending Nov. 30 to be “substantially below” the $29.9 million posted in the fourth quarter.

Before the stock price recovers, “I think management and the company have to produce one or two good quarters,” Martins said.

Summa has trimmed some low-margin product lines in the past year. In the aftermath of the failed sale effort, Swartwout said he’ll resume the strategy that’s gotten Summa this far: continue to develop new products, pare down debt, improve margins and, when the economy recovers, resume strategic acquisitions. “There are a lot of opportunities out there,” Swartwout said. “We don’t target distressed companies, and for good companies it’s not a good time to sell. A lot of people have said let’s keep in touch.”

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