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Quick Hit: AEP Industries should benefit from gobbling up a competitor and improving margins

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August 18, 2010 – Comments (3) | RELATED TICKERS: AEPI

 

I just added a long position in AEP Industries (AEPI) in CAPS at around $25.25/share.  Here's my quick pitch for the pick for anyone who's interested:

AEP produces a commodity product known as plastic film.

While the company does not appear cheap at first glance, its numbers should improve as time passes.  

It was hit by a double whammy of high oil prices in 2008 causing its input costs to soar and the Great Recession after that crushing demand for its products.

It's a testament to AEP's management that it survived this mess.  As an added bonus it even was able to pick off the assets of a competitor, Atlantis Plastics, after the aforementioned headwinds forced it to file for bankruptcy.  I love it when companies see competitors go bankrupt.  It often leads to dramatic gains in revenue and profits for the survivors.  It's even better when a company can purchase the assets of the competitor that is in BK on the cheap.  AEP was able to grow its production capacity by 40% in one brilliant move.

Add to this shrewd acquisition an improvement in margins as a result of AEP closing its terrible European business.

The prices of the company's key inputs have fallen significantly lately.  This and any continued synergies that can be squeezed out of the Atlantis acquisition should lead to a dramatic improvement in margins and profits in the second half of the year.

Plastic film being produced at one of AEP Industries' plants. 

Deej 

3 Comments – Post Your Own

#1) On August 18, 2010 at 4:39 PM, SockMarket (40.65) wrote:

seems like an interesting company. It looks like it is trading at 6x 2009 EPS and has a decent balance sheet, however I have a couple of worries:

 I suspect oil has much more upside potential than downside at this point

and

the EPS have recently gone negative. Do you know why?

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#2) On August 19, 2010 at 11:29 AM, TMFDeej (99.43) wrote:

Hey Daniel.  The reason that AEPI has reported losses lately is the price of one of the key inputs for its end products, ethylene, unexpectedly soared as a result of a temporary shortage.  

The shortage is now over and ethylene prices have plunged since over the past quarter.  This alone should make AEPI's business much more profitable in the next couple of quarters.  Add to this synergies from its acquisition and margin improvement as a result of the closing of the company's European operations and boom we have a recipe for a dramatic improvement in earnings in the short run.  

I almost see this position as more of a trade than a longer term holding.

Deej 

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#3) On August 20, 2010 at 12:47 PM, SockMarket (40.65) wrote:

Deej,

just saw this. 

that makes good sense, as long as there is a 1-time reason behind the EPS drop I am fine with it. AEPI certainly seems like a solid short term investment and a good thesis behind it all. 

i must say, your record with short term trading is pretty good, I think it is worth a CAPS add.

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