P&F Industries market research

Elkington

Buy

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Table of ContentsElkington

I. Thesis

II. Industry analysis

III. Company research

IV. Risks

V. Macroeconomic Trends

VI. Valuation

VII. Conclusion

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I. Thesis

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ElkingtonThesis

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P&F Industries (NASDAQ:PFIN)

Recommendation:BuyCurrentPrice:$9.13TargetPrice:$19.90

Catalysts

Risks

6/10/16

§ Activistinvestor,AndrewShapirokeepingmanagement focusedonrealizationofcompany’svalue

§ Internationalgrowth§ PotentialsalesfromCraftsmanbrandandpartnershipswithHomeDepot

§ P&Fhaslostsalesfromdeclinesinoil&gasmarket§ Willbeedgedoutofaerospacemarketbylargercompanies§ Willnotrealizeoperational savingsfromNationwidesale

ElkingtonThesis

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Recent News

Q1 Lawndale Feedback

6/10/16

2016 Q1 Earnings Call

§ FloridaPneumatic: 5.6%revenuegrowthYOY,butquarter-over-quarterdeclinesinboth theindustrialcatalogsectorof$224,000andotherproductsalesof$97,000mostlyduetoongoingoilandgasexplorationandextractioncrisis

§ ThepriceofcrudeoilcontinuestonegativelyimpactHy-Tech’sperformance.Withlowcrudeoilpricing,manyrotaryrigshaveclosedandaretemporarilynotfunctioning

§ Pneumatics'grossmarginimproved0.8percentagepoints ,whileHY-Tech’sgrossmargindeclined9.1percentagepoints

§ SaleofNationwidehashelpedreducedebtonbalancesheet

§ JosephMolinoisconfidentthatHy-Techcankeepworkingrelationshipwithmajorcustomerthathasin-sourced

§ Andrewisfocusedonwheregrowthwillcomefrom

§ LawndaleispushingfordevelopmentofproductsbeyondAIRCATlinesandincreasingdistributionchannels

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II. Industry analysis

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Global tools market

Industry Analysis

Growth

1. Powertoolsareoutpacinghand tools2. Globalvolumeofconstruction is

expectedtogrow~7%andreach$15trillionby2025drivenbyincreaseddemand fromdeveloping economies

3. Chinaaccountsfor80%ofallpowertoolsproduced

4. U.S.,China,andIndiaaccountfor~60%ofglobal toolsmarket

ElkingtonIndustry Analysis

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Growth of hand tools marketIndustry trends

Source: FMI

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III. Company research

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ElkingtonCompany research

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CompanyBusiness overview

Performance Management

Acquisitions

Richard Horowitz Chairman, President & CEO

Joseph Molino COO & CFORichard Goodman General Counsel

P&FIndustriesoperatestwowholly-ownedsubsidiaries,ContinentalToolGroupInc.andCountrywideHardware,Inc.P&Fisamanufacturerandimporterofair-poweredtools.ItalsoownsFloridaPneumaticandHy-Tech,whichsellpneumatictoolsforprivatelabelcustomers

Year Company Price Reason

2007 Hy-Tech $16.9millionincash

Increaseproductoffering

2014 AirToolServiceCompany

$7.65 million incash

Boost Hy-Tech’sproduct line

2014 ExhaustTechnologies

$10.37 million incash

ObtainAIRCATproduct

2014 UniversalAirToolCo

$1.95millionincash

GainaccesstoEurope


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Overview of P&F’s operational structure


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P&F: Florida Pneumatic

§ FloridaPneumaticimportsormanufacturesapproximately50typesofpneumatichandtoolsunderthenames"FloridaPneumatic","UniversalTool"and"Fuji",aswellasforotherprivatelabelcustomers

§ Pneumatictoolsaresimilartoelectrichandtools,butarepoweredbycompressedair,ratherthanbyelectricity,andaregenerallylessexpensivetooperate,lighterinweightandmorepowerfulthantheirelectriccounterparts


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P&F: Hy-Tech

§ Hy-Techmanufacturesanddistributespneumatictoolsandpartsforindustrialapplications

§ Hy-Techmanufacturesapproximatelysixtytypesofindustrialpneumatictools,mostofwhicharesoldatpricesrangingfrom$300to$7,000,underthenames"ATP","Thaxton","THOR"and"Eureka”aswellasunderthenamesforprivatelabelcustomers

§ Thelineofproductsincludesgrinders,drills,saws,impactwrenchesandpavementbreakerspoweredbycompressedair

§ Hy-Tech'sproductsaresoldtodistributorsandprivatelabelcustomersthroughin-housesalespersonnelandmanufacturers'representatives.

§ Customersincluderefineries,chemicalplants,powergenerationfacilities,theheavyconstructionindustry,oilandminingcompaniesandheavyindustry

Portfolio of Product Lines

§ Hy-Tech’sATP,Thaxton,THORandEurekabrands§ FloridaPneumatic’s FP,Fuji,andUniversalbrands§ PartnershipwithSears’Craftsmanbrand§ ContinentalToolandCountrywideportfolioof

productsandservices

Improved revenue growth and operational synergies

Thesis

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IV. Risks

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ElkingtonRisks

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Risks

§ P&Fisstillhighlyexposedtodecliningoil&gasmarket§ P&Foffers~75%-80%ofproductsrequiredforaerospacemarketthat

maynotbecompetitiveenough§ LargercompetitorssuchasIngersollRand,AtlasCopco ,andJPTools

havethescaletoundercutonprice§ Internationalexpansionmaynotworkwithoutmorefocuson

productqualityanddevelopment

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V. Macroeconomic trends

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ElkingtonMacroeconomictrends

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Bank credit and M2 growth

Source: Deutsche Bank, PBoC


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Debt and EBITDA growth diverging

Source: Societe Generale


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Market valuations are creeping upwards


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Market stability not being helping by increase in margin


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Corporate profits may have already hit a ceiling


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Buffett Indicators signals overpriced market


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Fossil Fuels will still be part of energy portfolio

Source: BNEF

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VI. Valuation

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ElkingtonValuation

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Comparable companies

Company (asof5/20/2016)

SharePrice ($) MarketCap($B)

Enterprisevalue ($B)

Rev.Growth% Current P/E ForwardP/E EV/EBITDA EV/Revenue PEGRatio

GHM 18.42 177.31M 112.84M -40.50% 30.20 42.84 12.37 1.25 4.27SWK 112.94 16.74B 20.97B 1.60% 18.68 16.09 11.80 1.87 1.80SNA 155.90 8.81B 9.84B 1.70% 18.58 15.61 11.47 2.73 1.78QEPC 16.50 53.23M 72.87M 8.20% 13.41 N/A 5.88 0.24 N/AATLKY 25.04 22.00B 31.69B -6.50% 21.87 N/A 11.19 2.56 N/AMean 65.76 9.56B 12.54B -35.5% 20.55 24.85 10.54 1.73 2.62Median 25.04 8.81B 9.84B 1.60% 18.68 15.61 11.47 1.87 1.78High 155.90 22.00B 31.69B 8.20% 30.20 42.84 12.37 2.73 4.27Low 16.50 53.23M 72.87M -40.50% 13.41 15.61 5.88 0.24 1.78P&F 9.13 32.80M 32.05M -0.40% 12.18 15 3.73 0.39 0.3

Source: SEC Filings

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Comparable companies cont.

§ Among it’s peers, P&F trades at a severe discount across every important statistic

§ This discount is not justified due to the company’s product power, change of capital structure, and long term earnings power

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Discounted Cash Flow Analysis

Source: PFIN SEC Filings

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Discounted Cash Flow Analysis cont.


ElkingtonValuation

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Discounted Cash Flow Analysis Cont.

Valuation Sensitivity


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Source: SEC Filings

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Technical Analysis

PFIN is trading above its 200 day EMA signaling long-term price strength

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Debt Analysis

Source: Morningstar

§ PFINhasrecentlypaidoffmostofitsdebtproviding acompanythatwillberelativelymorestableinarising interestrateenvironment

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Catalysts

1. AndrewShapirofromLawndaleCapitalManagement hasbeenmanagementalignedwiththegoalsofunlockedP&F’sintrinsicvalue

2. InternationalgrowthinEuropeaswellasinCanadawithHomeDepotshouldcontributetorevenuegrowth

3. PotentialsalesfromCraftsmanbrandbecomingavailableoutsideofSearsshouldactasanotherdistributionchannel

4. PotentialpartnershipswithHomeDepotencouragedbyLawndale5. Companyhaslittledebtandshouldbeabletoweathermacroeconomic

cycle6. Oil&gasmarketmayhavebottomedoutandP&Fshouldbeabletoseea

benefitofarecovery7. Canremaincompetitivewithlargercorporationsaslongasproduct

development isfocusedon8. SaleofNationwidehasalloweddebttocomeoffbalancesheet

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Price target

Base: $19.90§ Aligned with historical revenue growth§ 7% gross margin; in line with historical margins§ 12x exit multiple, implying 3.0% perpetual growth Best: $24.89§ High revenue growth§ 8% gross margin; slight improvement from historical margins§ 15x exit multiple, implying 5.0% perpetual growth Worst: $15.91§ No revenue growth§ 5% gross margin; in line with historical margins § 9-10x exit multiple, implying 1-2% perpetual growth

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VII. Conclusion

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Conclusion

Conclusion

OperationalGrowth:-Growthopportunities inEuropeandCanada-Expansionofproduct lines

FinancialDiscipline:-Lawndaleshould beabletokeepcompanyandstraightandnarrow

AcquisitionOpportunities:-Withlittledebt,companyisinapositiontofinddealsthatwillsynergizewithexistingproductlines

P&F Industries market research

Economy & Finance

Transcript of P&F Industries market research