Throughout the current crisis, I’ve recommended that investors take the long view. When it comes to Alpha Pro Tech (NYSEAMERICAN:APT) and APT stock, that advice holds true — but for a different reason than most stocks in the market.
After all, many quality companies are seeing significant short-term hits to their sales and profits. For instance, Square (NYSE:SQ) swung to an adjusted loss in its first quarter after profits the year before. But as the economy recovers, so will Square stock.
For Alpha Pro Tech, a manufacturer of PPE (personal protective equipment), the effect is reversed. APT just posted a blowout first quarter report, with huge spikes in revenue and profits.
Of course, the quarter benefited from an enormous boost to demand driven by the coronavirus. That boost will fade over time. APT stock likely will do the same.
A Blowout Earnings Report
To be sure, Alpha Pro Tech’s first quarter report was impressive. Revenue increased 47.5% year-over-year. Net income more than quadrupled.
APT stock bulls can point to strong margin improvement in the quarter as well. Gross margin was 47.1% in the quarter, up from 38% the year before. The improvement came both from higher volume — it’s cheaper on a per-unit basis to produce more units — and from mix shift.
Namely, the N-95 respirator and the company’s face shields both have higher margins than the company’s other products. Of course, those are precisely the products driving the growth in Q1 and beyond.
This seems like something close to a spectacular quarter, yet the market has mostly shrugged.
APT stock did rise 4.2% on the day of the release last week, and posted a modest gain the following day. But a pair of sell-offs leave the stock, at Monday’s close, exactly back where it was before earnings.
In fact, APT stock has traded basically flat for nearly two months now. During that stretch, the S&P 500 has gained about 18%.
The First Risk for APT Stock
The relatively flat trading in APT of late makes some sense. Traders who were early to the story made a killing as the stock soared from a year-end close of $3.43.
In late February, we saw a bit of a bubble, as the stock briefly cleared $40. Since March the stock has settled in around $12-$13.
The market has priced in the boost to demand. It’s priced in growth like Alpha Pro Tech saw in the first quarter.
In fact, it’s priced in years of growth. Alpha Pro Tech’s earnings growth of 300%-plus seems spectacular on a percentage basis. But the company added a little over $4 million in profit year-over-year.
Meanwhile, APT stock has added $135 million in value since the start of this year.
That doesn’t mean, necessarily, that shares have run too far. Results actually should get better going forward. APT only fulfilled $3.7 million in N-95 orders in the first quarter. It’s booked $46.8 million in such orders just since Jan. 27.
Rather, the point is that the stock has rallied 270% so far this year. Results are going to get better, but to at least some extent that’s already priced in.
And if this crisis recedes, that demand will as well. Again, investors are taking the long view. That’s why U.S. stocks more broadly have rallied. It’s also why APT has stalled out.
The Second Risk for APT Stock
There’s another aspect of the stock to consider, however. Alpha Pro Tech isn’t just a PPE manufacturer.
APT also provides construction weatherization products such as building wrap. In 2019, in fact, that business generated more than half of revenue. According to the company’s Form 10-K filed with the U.S. Securities and Exchange Commission, the Building Supply segment delivered 47.5% of segment-level profit in 2019.
The Building Supply segment contributed to the strong Q1 numbers, with revenue growth of 16%. But that business is going to struggle in the near term, as APT itself wrote in the first quarter release. Softer construction spending and activity will pressure revenue.
To be sure, N-95 and face shield growth won’t be offset by building products weakness. But investors looking for a pandemic play need to at least realize that half of pre-crisis revenue came from a business which may struggle in coming quarters.
The Long View
It makes some sense. All three stocks have soared — but at some point in the future (hopefully), the tailwind to demand will fade.
These stocks aren’t like Costco Wholesale (NASDAQ:COST) or Zoom Video Communications (NASDAQ:ZM), where the current crisis drives revenue that can last for years to come. There’s going to be a boost to sales and profits, which then likely will settle in at a “new normal” level going forward.
The stocks in the sector unsurprisingly have done basically the same thing. Again, that makes some sense. The market priced in the new normal as savvy and fast traders entered. But at this point, the easy money has been made.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.