Manufacturer of Auto Parts Needs Stock Super-Charge
Corporate Focus
by Anthony Palazzo
In a stock market that still harbors its share of overpriced companies, Edelbrock Corp. (Nasdaq: EDEL) is undervalued by almost any measure available. Most stocks trade for well above book value, for instance, because the value of the ongoing earnings stream isn’t taken into account. Not Edelbrock.
The Torrance-based manufacturer of performance automotive parts has a book value of $81 million, but the stock can be purchased for roughly 75 percent of that. At a recent price of $12.80 a share, the company’s market capitalization was only $63 million.
Edelbrock is profitable, has virtually no debt, and even after a 24 percent run-up this year, the stock is trading for only 15 times earnings over the past 12 months, when a recession and high natural gas prices at its San Jacinto, Calif., aluminum foundry ate into profits. “We would love to have all of them be this cheap,” said Richard Todaro, a portfolio manager at Kennedy Capital in St. Louis, an investment firm specializing in under-followed companies.
His firm bought nearly 4 percent of Edelbrock’s shares last year at around $9.50 each. Now Kennedy Capital wants to see Edelbrock’s stock rise. “Our cash flow analysis of the company shows a valuation of $25 or $26 a share. That’s probably what these guys would get if they sold the company to somebody,” Todaro said.
There are reasons why certain investors shun Edelbrock. Most institutions won’t touch companies that trade so few shares, between zero and 10,000 on most days. Chief Executive Victor Edelbrock Jr. holds 52 percent of the 5 million shares outstanding, and other family members and insiders hold a sizable chunk. Even smaller firms won’t cover the stock because they can’t earn enough in trading commissions to pay for the research.
Engine tinkering wanes
Also, there’s the matter of perception. Performance engine parts manifolds, carburetors, cylinder heads have been the staple of Edelbrock since Vic Edelbrock Sr. opened a machine shop on Highland Avenue in Hollywood, shortly after World War II ended. But the heyday for tinkering with engines was in the 1950s, ’60s and ’70s, before oil shocks put a damper on America’s love affair with the car. Today’s tinkerers are more likely to gravitate toward electronics.
“I remember when I was a kid, if you wanted to soup up your little old V-8 engine you did it with Edelbrock,” said Dale Benson, chairman of Benson Associates in Portland, Ore., another large shareholder. Even today, car enthusiasts tend to work on models from that era the ’57 Chevy Bel Air, the mid-’60s Ford Mustang or the Chevy Impalas of the early-to-mid 1960s.
The challenge these days is to continue developing new products and expand the customer base beyond the core crowd of muscle car and street-rod enthusiasts.
Vic Edelbrock Jr., who took over the company in 1962 (it went public in 1994), points to such newer areas of growth. A seven-year effort to supply aftermarket engine parts for Harley-Davidson motorcycles has had its ups and downs, but finally seems to be gaining traction, as is the December 2000 purchase of Russell Performance Products, a maker of brake and fuel lines. Enhanced product displays at auto parts stores such as Pep Boys and AutoZone are giving the brand added exposure.
Edelbrock has also taken aim at the legions of Chevy Suburban and Ford Explorer drivers, with a line of shock absorbers and fuel-injection systems to improve ride and performance. Finally, there’s the smaller-car market, dominated by Japanese autos. Edelbrock just launched a header (an exhaust part) for the Ford Focus, and is developing a cylinder head for Honda and Acura engines.
“There’s only so many street rods, although they’re building them all the time. There’s only so many muscle cars, these new areas are areas of growth for the company,” Edelbrock said.
Hits and misses
It’s a trial and error process, as Edelbrock is quick to admit. The first cylinder heads for the Harleys, for instance, didn’t provide the horsepower the riders were looking for.
Edelbrock developed a header that balanced horsepower with torque, the seat-of-the pants sensation that comes when accelerating from a dead stop. But he didn’t realize that Harley riders use horsepower statistics for bragging rights, lining up to be tested on engine-dynamometers set up at way-stations in the Arizona desert.
“We didn’t really understand that market,” Edelbrock said. Generally better engineering on factory autos, particularly from the Japanese, is another challenge.
Then there’s the stock price.
Todaro, of Kennedy Capital, has been peppering Edelbrock with suggestions:
Normally stock buybacks help raise the price, but here it would exacerbate the shortage of shares in the public float. There’s the possibility of a sale of the company, but Edelbrock doesn’t seem ready for that. Lately, Todaro has been pushing for a 10 percent stock dividend to increase the public float by 500,000 shares.
Edelbrock also wants the stock price to rise, but he’s being tight-lipped about exactly what he plans to do, other than operate the company. “We’ll be doing some things that we think will help the price of the stock go up, but we also look long term,” he said. “We’re a good company with no debt, and we make money. We’re going to continue to do that and hang onto our growth.”
Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at
[email protected].
Drug Exposure
American Pharmaceutical Partners Inc. fought through turmoil in its stock trading last week after a report raised questions about the generic drug supplier’s relationship with an early investor and business partner.
A New York Times story outlined potential conflicts of interest between American Pharmaceutical Partners’ and Premier Inc., one of the hospital industry’s biggest purchasing groups.
American Pharmaceuticals’ stock fell 24 percent the day the story came out, but made up about half the loss the following day, when the company issued a rebuttal.
At the March 27 close, the Los Angeles company was trading at $14.85, down about 15 percent over the two-day span.
Premier helped set up American Pharmaceutical in 1996 and invested a mere $100, according to the Times, and received a stake that was worth $46 million when the company went public in December.
The story said that American Pharmaceuticals’ rapid growth is at least partly attributable to a contract to supply Premier with generic drugs. It also raised questions about the quality of the young firm’s products.
In its rebuttal, American Pharmaceutical called the story “irresponsible and unbalanced.” It pointed out that it supplies other hospital purchasing groups, and defended its safety record.
American Pharmaceutical Partners has attracted controversy since its $16 a share initial public offering last December. It is led by Dr. Patrick Soon-Shiong, who attracted attention in the mid-1990s for an experimental treatment for Type 1 diabetes. After much attention for its apparent success initially, the treatment eventually failed.
As previously reported last year in the Business Journal, American Pharmaceutical and its parent, American BioScience Inc. both founded and headed by Soon-Shiong have been involved in a string of litigation. One earlier dispute resulted in both companies being jointly liable for a $24 million payment to an entity controlled by Soon-Shiong’s brother, Terrence.
Anthony Palazzo
