Acme United: Staying power
Back in the days of the Johnson presidency – Andrew, not Lyndon – a little company began as a grinding shop in Bridgeport, Conn., to make scissors and keep them honed to perfection in a post Civil War America.
The little grinding shop, formed in 1867 as a local partnership and incorporated in 1882, was known for decades as Acme Shear. From its incorporation until the 1990s, the Wheeler family ran the show, before Walter Johnsen came in as president and chief executive officer in 1995.
Now headquartered in Fairfield, Conn., Acme has morphed into Acme United Corp. (AMEX: ACU). The company has sprung from its Americana small-business roots into a global provider of some basic products: as it says in its annual report, “innovative cutting, measuring and safety products to the school, home, office and industrial markets.” It has manufacturing and distribution facilities in the United States, Germany, Canada and Asia, yet it remains a microcap, with just about $50 million in market capitalization.
Its products might be considered mundane, but the range is fairly diverse. Most schoolkids and their parents should recognize one of its main brands – Westcott, a name that’s been around since 1872 – through which it sells rulers, scissors, letter openers, paper cutters and other items. It also makes house brands of those basic products for retailers such as Wal-Mart Stores Inc. (NYSE: WMT), and office superstores including Staples Inc. (Nasdaq: SPLS) and OfficeMax Inc. (NYSE: OMX).
The company sells cutlery under the Clauss brand. Established in 1877, Acme acquired the choicest Clauss products in 2004, including industrial and floral scissors, knives, cutters and shears. The line also includes professional kitchen cutlery, pruning shears and sewing scissors.
Since playing with sharp tools is likely to lead to accidental cuts, or other nicks, its PhysiciansCare division sells first-aid kits, biohazard handling materials and other safety products.
How difficult is it for Acme United to remain on the cutting edge? The company is actively developing new technologies to enhance its existing products or lead to the launch of new ones. For instance, it holds key patents on a titanium-bonding process that keeps cutting edges sharper for longer periods than traditional stainless steel, while enhancing the strength of the devices and making them corrosion resistant.
In early 2006, Acme showed that it’s ready to compete in an iPod/iPhone/Internet-savvy world by launching an “iZone” family of school tools. It also introduced a revolutionary electric pencil sharpener, called the iPoint, which is Acme’s first foray into the sharpener segment. The company says the iPoint puts a perfect point on pencils, automatically and hands-free, with a sensor ejecting it when it’s done. Titanium blades keep it sharper longer.
While its line of safety scissors are well known for fitting little hands, Acme’s also marketing “Scissor Critters,” with handles bearing animal shapes. Similarly, the company has branched out into holiday-themed scissors and shears, with handles decorated like snowmen, reindeer and ornaments.
The company has received recognition for its products. In its June 4 issue, BusinessWeek ranked Acme United among its top-100 growth small companies, at 66th, for its sales and earnings growth and return on capital for the past three years. Last summer, Fortune Small Business ranked Acme at No. 88 on its list of America’s fastest-growing small public companies. And the Chicago Athenaeum, Museum of Architecture and Design present the company with one of its “Good Design” awards for the iPoint sharpener.
Acme United flies under the radar of most analysts. Last fall its executives presented at a “Best of the Uncovereds” conference in New York City, presented by Singular Research.
Singular analyst Harris Hall said that since he began covering Acme in September 2004, the share price has increased 67%, noting that it’s up 3% year-to-date, after recovering from a March sell-off that saw it sink to $13.60.
Revenue has nearly doubled in the past five years, while net income has more than tripled and its share price has increased nearly fivefold. For 2006, the company reported a 14% increase in net sales, to $56.9 million. Net income for the year rose to $3.9 million, or $1.05 per share, compared with $2.9 million, or $0.78 per share, in 2005.
While the company product line has remained sharp, its first-quarter earnings report was dull: net sales for the quarter ended March 31 were flat at $12.2 million; net income fell slightly to $650,000 from $759,000 the year before; while earnings per share dropped $0.03 to $0.17.
“The first quarter of 2006 had strong comparisons to meet,” Johnsen, now the chairman and CEO, told investors on an April 20 conference call. “In the beginning of 2006, we filled a major warehouse club chain with Clauss chef shears, began initial global shipments of scissors to one of the largest office superstore chains, and shipped the first iPoint pencil sharpeners to a mass-market chain. These initial (shipments) were well over $1 million in sales in the first quarter of 2006.”
That followed just a 9% sales increase in the final quarter of 2006, as net income fell to $396,000 from $773,000 in fourth-quarter 2005. Losses in Europe tripled to $1.1 million in the 2006 Q4.
The softness in the first quarter didn’t bother analyst Hall. “Some people were upset with that report, but that’s short-sighted,” he said. “Their strength is in the back-to-school shipments, the June-July period.”
Acme has remained comfortable with its publicly stated sales and earnings forecasts. On that April call, Johnsen affirmed past expectations for 2007 that called for net sales of $65 million and net income of $1.25 a share. “At this stage,” he said, “we see that this is a reasonable estimate,” but noting that might change as the spring and summer progressed.
Singular’s Hall, who has a $27 price target on Acme United, said the company is taking steps to turn around its European operations, which they hope will give it the momentum to have a positive influence on the bottom line.
The question is whether the stock can break out of a small trading range, with its most recent 52-week high of $15.97 reached nearly a year ago, and March 7 low of $13.30. Shares closed Thursday at $14.85. Message boards were buzzing in June when a leading Acme investor, R. Scott Asen, disposed of some of his holdings, 22,300 of his approximately 350,000 shares. Insider trading analysis by Thomson Financial found that “ACU shares have declined an average of 12.5% in the six months following 12 prior sell decisions” by Asen.
But Singular’s Hall stands by his $27 price projection, believing that the rich product mix, changes in Europe and the potential of even more sales to Wal-Mart and other chains justifies the possible 82% upside potential.
Acme United is expected to report its second-quarter results in the coming weeks. The quarter will signal the strength of its back-to-school orders, and give investors a better idea if the company has enough cutting-edge products in the development pipeline to keep its customers satisfied.
