A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that makes rubber-based products for a variety of heavy industries including defence.
Pat likes its rising sales as well as its solid yield. The company’s opportunities in the defence sector are huge, but there are still many hurdles to jump before the biggest benefits can be realized.
AirBoss of America Corp. (Symbol BOS on Toronto; www.airbossofamerica.com), makes rubber-based products used in the automotive, heavy industry, construction and infrastructure, oil and gas, and defence industries.
AirBoss is headquartered in Newmarket, Ontario, and operates manufacturing facilities in North Carolina, Quebec, and at its flagship facility in Kitchener, Ontario. That plant opened in November 2019 and includes a research laboratory and state-of-the-art technical and testing centre.
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The company operates through three business segments:
Rubber Solutions (25% of total revenue) develops and manufactures custom rubber compounds, extruded materials, and molded products for use in various applications and industries.
Engineered Products (24%) designs, engineers, manufactures, and sells rubber, synthetic rubber, and rubber-to-metal bonded products that are used to eliminate or control vibration and noise.
AirBoss Defence Group (51%) develops, manufactures, and sells chemical, biological, radiological, and nuclear protective equipment for military, first response, and healthcare applications.
AirBoss’s total revenue increased just 7.6% in the five years from 2016 to 2019. Specifically, revenue rose from $304.9 million in 2015 to $328.1 million in 2019 (all amounts except share price and market cap in U.S. dollars). Earnings over those five years fell 23.3%, from $13.3 million ($0.58 per share) to $10.2 million ($0.44 per share).
That lackluster performance drove down the share price from $25 in mid-2015 to as low as $8 in early 2020—before the coronavirus downturn. The share price then fell further to $4.59 in mid-March of last year.
After that, the shares skyrocketed to as high as $26.67 in July 2020, before moving down to today’s price.
Inner Circle: Defence contracts offer huge revenue and earnings opportunities
In the three months ended September 30, 2020, AirBoss’s overall revenue soared 110.9%, to $162.7 million from $77.2 million a year earlier. The gain reflects the CSI merger (see below) and large contract wins. Those included its FEMA contract for respirators, a large respirator contract from the U.S. Department of Homeland Security, and personal protection equipment (PPE) contracts within the health care and military markets.
The company earned $11.7 million, or $0.50 a share, in the quarter, up sharply from $1.8 million, or $0.08.
The COVID-19 pandemic has generated challenges but also opportunities for AirBoss.
The company sells a range of personal protective equipment, including masks and wearable respirator suits, for first responders and medical professionals. Producing this type of gear became a priority in the wake of the COVID-19 pandemic. It has also spurred the company’s sales and share price.
Longer term, an even larger growth opportunity for the company is defence contracts. They’re valued at hundreds of millions of dollars globally for AirBoss’s portfolio of military protective equipment. That includes the company’s latest gas mask, featuring reduced breathing resistance and a large anti-ballistic lens.
Its Blast Gauge System should significantly bolster the company’s sales. The wearable technology relies on sensors to measure and transmit data on explosive blasts. Traumatic brain injury among military personnel due to blast overpressure is increasingly blamed for neurological conditions, including depression and PTSD (post-traumatic stress disorder). With the high cost of treatment and the growing impact on the quality of life for veterans, finding a solution to blast overpressure has become a top priority for militaries. Blast Gauge is currently in late-stage testing with the U.S. Department of Defense and, on acceptance, could represent a substantial source of recurring revenue for AirBoss.
In May 2020, the company merged its defence industry business with Critical Solutions International, Inc. Based in Charleston, South Carolina, it’s a supplier of route clearance vehicles and survivability gear. CSI’s product line complements AirBoss’s portfolio of personal protective equipment. At the same time, CSI’s marketing strength and strong relationships with governments and militaries around the world will drive sales for AirBoss equipment. AirBoss held 55% of the AirBoss Defence Group joint venture, and Critical Solutions, 45%.
The joint venture quickly paid off. In May 2020, the U.S. Federal Emergency Management Agency (FEMA) awarded AirBoss Defense Group a $96.4 million contract for 100,000 PAPRs (powered air purifying respirators) and 600,000 filters and related accessories.
Meanwhile, in October 26, 2020, AirBoss announced that it had acquired the remaining 45% of the AirBoss Defense Group that it didn’t already own from Critical Solutions. The company issued 3.5 million shares of its stock to pay for the transaction along with $5 million in cash on closing and $5 million in cash for three subsequent quarters.
Going forward, a number of AirBoss products, including its powered air purifying respirators (PAPRs) and medical isolation transportation systems (ISO-PODS), represent a significant revenue opportunity for the company.
On September 30, 2020, AirBoss held cash of $43.1 million. Its long-term debt of $66.8 million U.S. is a low 9.0% of its market cap. The stock yields 1.2%.
Recommendation in Pat’s Inner Circle: AirBoss of America Corp. is a hold.
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