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