There is just one producer of ammonium perchlorate in North America; a primary ingredient for rocket propellant. Although Las Vegas-based American Pacific Corporation (Nasdaq:APFC) enjoys a monopoly position, it's struggled at times to make money. Not a stock for widows and orphans, it does present an interesting opportunity for investors with a high tolerance for risk. Here are three reasons its stock is ready to take off.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
Specialty Chemicals
The company's history goes all way back to 1955, when it began life as the Pacific Engineering & Production Co. of Nevada, producing perchlorate chemicals. In 1998, it became the only supplier of rocket-grade ammonium perchlorate, when it acquired Kerr-McGee Chemical Corporation, its principal competitor. Alliant Techsystems (NYSE:ATK) and Aerojet, a subsidiary of GenCorp (NYSE:GY), accounted for about 28% of its overall revenue in fiscal 2011. With the space shuttle permanently grounded, it will have to rely on commercial opportunities to grow its business. If the first six months of 2012 are any indication, it is doing just fine. Revenues for Q1 and Q2 combined ended March 31 were $33.2 million, 66.8% higher year-over-year. More importantly, operating profits increased 138% to $16.9 million. That's an operating profit of 51%.

The bad news is that revenues for the remainder of the year won't grow. In fact, revenues and operating profits for the entire fiscal 2012 should decline between 10-20% from last year. Nonetheless, its operating profits should still be extremely robust. This is not the segment under a microscope.

Fine Chemicals
In November 2005, it acquired GenCorp's fine chemicals business for $133.4 million. It went from being essentially a one trick pony to a company with two substantial operating segments and a third - aerospace equipment - on the way. In the second quarter 2012, all three segments generated at least $15 million in revenue. Now if it can only figure out how to consistently make money from its biggest segment, shareholders will be laughing.

Since GenCorp completed its game-changing acquisition in 2005, it has made just $28.6 million in operating profits over the six years it's owned the business. At that rate, it will easily take more than two decades to repay the entire investment. Management isn't oblivious to the fact that it made more than $16 million in profits in both 2007 and 2008 and are working to make it more efficient. By the end of 2012, it will have restructured its fine chemicals business to start making money again. This is what will drive the stock price higher.

SEE: Analyzing An Acquisition Announcement

Stock Price
Since late 2008, American Pacific's stock has traded exclusively below $10. In February 1992, it traded as high as $41. In recent years, its best effort was $18 in October 2007.

In 2008, operating profits were the highest in its history at $24.9 million. There's a good chance its adjusted EBITDA will be $35 million in 2012. That's only $7 million or 16.7% less than in 2008. While it might not deserve an $18 stock price, it also can be said that it doesn't deserve $8, as well. Both DuPont (NYSE:DD) and Dow (NYSE:DOW) have enterprise values approximately eight times EBITDA. American Pacific's multiple is less than four times EBITDA. The true value likely lies somewhere in between.

The Bottom Line
American Pacific should generate $220 million in revenue in 2012. It's never going to be confused for DuPont or Dow. However, its downside appears limited. For those willing to bet on this tiny micro cap, you will be rewarded soon enough.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  4. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  5. Entrepreneurship

    Top 10 Side Jobs You Could Start Now

    Ways to make extra cash in your spare time.
  6. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  7. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  8. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!