For some time now, I have been researching companies trading on the Pink Sheets - hoping to find cheap stocks buried among the shell companies, development stage companies, and a host of other unattractive securities. QEPC is one such interesting opportunity for the small investor.
QEPC is a provider of flooring and industrial solutions. QEPC sells a comprehensive line of hardwood flooring, flooring installation tools,
adhesives and flooring related products targeted
for the professional installer and the "do-it-yourselfer." QEPC voluntarily delisted from the NASDAQ in 2009, and the shares have since traded in the OTC markets.
Over the last several years, QEPC has been growing both organically and through acquisitions. Their acquisition history has been interesting - purchasing broken businesses on the cheap, and plugging the products into QEPC's distribution system (below I include some links where management discusses a recent acquisitions which gives a little insight into this strategy).
Except per share amounts, all numbers in tables and text below are in thousands.
Financial Performance
QEPC's six-year record is below. These are for fiscal years ending in February.
Over the last several years, QEPC has been growing both organically and through acquisitions. Their acquisition history has been interesting - purchasing broken businesses on the cheap, and plugging the products into QEPC's distribution system (below I include some links where management discusses a recent acquisitions which gives a little insight into this strategy).
Except per share amounts, all numbers in tables and text below are in thousands.
Financial Performance
QEPC's six-year record is below. These are for fiscal years ending in February.
| Income | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 |
| Revenue | 261,408 | 237,886 | 205,853 | 203,603 | 217,505 | 216,006 |
| COGS | 182,520 | 164,334 | 140,486 | 147,571 | 154,684 | 156,658 |
| Operating Income | 16,172 | 15,169 | 13,712 | -4,425 | 9,685 | -3,642 |
| Interest Exp | 929 | 1,363 | 1,156 | 1,740 | 2,538 | 2,977 |
| Pre tax earnings | 15,243 | 13,806 | 12,556 | -6,165 | 7,147 | -6,619 |
| Provision for taxes | 5,022 | 4,372 | 3,579 | 1,090 | 3,512 | 624 |
| Earnings | 10,221 | 9,434 | 8,977 | -7,255 | 2,196 | -5,806 |
| CFO | 12,173 | 9,545 | 15,312 | -520 | 7,212 | 4,859 |
| Balance Sheet | ||||||
| Cash | 976 | 447 | 856 | 695 | 949 | 822 |
| Receivables | 35,386 | 31,350 | 32,792 | 26,746 | 32,543 | 34,491 |
| Inventory | 31,441 | 34,447 | 30,485 | 24,446 | 26,496 | 27,042 |
| Assets | 87,209 | 88,175 | 86,047 | 68,965 | 85,626 | 87,156 |
| Equity | 45,435 | 35,243 | 26,025 | 15,540 | 26,355 | 22,050 |
| Notes Payable, Debt, LOC | 12,660 | 21,663 | 26,831 | 29,566 | 31,236 | 36,439 |
| Other Information | ||||||
| Diluted Shares | 3,392 | 3,409 | 3,496 | 3,415 | 3,588 | 3,411 |
| Depreciation | 2,613 | 2,565 | 1,518 | 2,005 | 2,089 | 2,568 |
| CapEx | 1,068 | 2,814 | 601 | 842 | 2,981 | 730 |
| Goodwill Impairment | 0 | 0 | 0 | 7,927 | 0 | 7,520 |
Some of
my notes/comments on the financial performance:
- Adjusting for the goodwill impairments, which appear to have been taken simply because of a decline in the stock price (which has since risen), QEPC has earned 33,214 in total or 5,536 on average
- Cash flow from operations totaled 48,581 (or 8,097 on average)
- Debt is being aggressively paid down
After adjusting the earnings record for the goodwill impairments mentioned above, FIFO to LIFO COGS adjustment, Capex/depreciation differences, changes in capital structure and +/- a few other small items, I estimate that QEPC's no growth earning power is between 5,500 and 7,500. Slapping an 8-10x multiple on this, gets a value of 44,000 to 75,000.
The above calculations do not directly account for growth potential (which historically has been positive). In a related context, they also do not directly consider the non-zero probability that an improvement in the housing market in the coming years will increase QEPC's earning power materially. For these reasons, I am inclined to believe that QEPC's value is towards the high end of that range (which actually is a closer approximation of cash flow from operations), and may prove too conservative in the several years to come.
Using diluted shares at the current share price of 14.95, QEPC currently sells for 50,541.
Other comments and notes
Below are some notes, both in the positive and negative columns.
Pros:
- The founder (Lewis Gould) is still the CEO, and owns around 50% of the company (according to SEC filings from 2008)
- Couldn't find too much on the CEO, but from some
of the old earnings call transcripts seems like a bit of a fanatic (in a
good way): http://www.sbnonline.com/2006/05/lewis-gould-chairman-and-ceo-q-e-p-co-inc/; http://
www.sec.gov/Archives/edgar/ data/1017815/ 000119312505201156/dex991.htm (this one discusses some of the accounting issues in the cons); http://www.sec.gov/ Archives/edgar/data/1017815/ 000119312506134020/dex991.htm; (with the Lewis Gould’s son, discusses Harris Wood acquisition) http://www.fcnews.net/ 2011/01/harris-wood-a-diamond- that-needs-polishing/
Cons:
- They had some accounting issues in 2005 and 2006 (a material control deficiency that resulted in a restatement); this appears to have been honest mistakes, not fraud
- Sales are heavily concentrated in Home Depot and Lowes; a counterpoint is that the product mix they sell to them is pretty diverse, but this counterpoint still depends on HD and Lowes staying in business
- Other obvious cons with pink sheets stocks (outside of SEC purview, a lot less volume)
One additional comment is that - although I would prefer to know the answer to this question - I do not know exactly why QEPC appears this cheap. There are some usual explanations that obviously contribute (e.g., pink sheets, limited volume, lack of analyst coverage etc), but I cannot confidently say this is the whole reason. Despite this, and the noted cons above, the price appears low enough so as to offer a reasonable degree of safety. That is, absent fraud which I believe highly unlikely.
I emphasize that investors must do their own research and reach their own conclusions with regard to any investment decision.
Disclosure: Long QEPC
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