ATB.TO - Atrium Innovations

[Cardboard]

ATB.TO is an interesting growth story with high margins and strong free cash flow for a very attractive P/E. I invested a little while back around $14.50 while they were re-introducing one of their big product in Germany. This issue seems now fixed, but I think that despite the rise today that the story is getting even better than when I bought with the latest two acquisitions.

 

They make and sell health supplements primarily to health practitioners which is a niche market and drives better margins, repeat sales and reputation than the vitamins and other things that you find at GNC and at the pyramid re-sellers. 2011 P/E is now 8.6 times and this company has been able to grow earnings rapidly. 2010 was a slow or consolidation year, but it seems that they are getting back to growth mode: it was just over 40% a year for EPS and sales between 06 and 09.

 

While I don't count on a repeat, the current price looks way too low considering the margins and the fact that their sales seem recession resilient. A risk factor is growth via acquisitions which is always risky, but these guys have always made tuck-in type acquisitions and never "bet the farm" type of deals. The board of directors is also pretty strong for a small company with Claude Lamoureux and Alain Bouchard (CEO of Couche-Tard) or a guy who knows a thing or two about growth via deals.

 

Finally, a "competitor" or NBTY Inc. which is much larger, not a niche player and with lower margins was acquired by Carlyle Group in 2010 for a P/E just over 14 times. So if they keep trading at such low multiple there is a chance for someone to knock at the door.

 

Like anything else there is always some risks, but I find the story quite compelling considering the high growth and high margins at a P/E below 10 on a company where it is hard to find any real issue.

 

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[bonechip1]

I recently looked at Atrium a few months ago, and agree it is interesting and seems cheap, but I do not own yet.  I think the biggest risk is regulatory (although majority of Atrium products are high quality, science based and pharmaceutical grade).  For example, in Canada, Bill C-36 gives enforcement officers increased powers to seize natural health supplement products.

http://www.suite101.com/content/bill-c36---health-canadas-new-powers-put-canadians-at-risk-a321906

 

They seem to be paying  a higher multiple for this recent acquisition than they have paid in the past, although it does not include any earn-out payments, so may be cheaper for them in the end.

 

 

[biaggio]

Thanks for presenting the idea.

 

Presentation by company http://atrium-innovations.com/wp-content/themes/thematic_child_1/uploads/documents/presentation-and-events/atrium-investor-presentation.pdf

 

Disappointed that management only own 3.4% of company.

 

Intrigued by involvement of former Ontario Teachers Pension CEO Claude Lamoureaux.

 

Interesting that they own brands in europe that have been around 25-50 years. I don t recognize their brands here in Canada, but appears to be a larger player overseas.

 

A lot of exposure to the euro? (product mix 64% US + 30% Europe).

 

Assuming that the company is not bought out where do you foresee this company being in 10 years? Do you think it can maintain its profits over the next 10 years?

 

It seems like there are a lot of companies selling supplements out there, though I d admit  that when I go out to buy a vitamin or other supplement I do look for a brand that I recognize.

 

Qualitatively do you think this is a good company selling at a great price?

 

 

[Cardboard]

Well, I have taken a beating on that position and I apologize to whomever might have followed me after posting the idea.

 

The fact remains that the story is largely unchanged. I really don't understand why the stock dropped so much after Q4 results or now below the lows of the financial crisis. Maybe that growth is not as fast as some would like. Maybe that inventories are a little higher than usual. What has changed is that top executives are now buying stock at this low price and the company has been buying back shares all year or 700,000 around $13.

 

The P/E is now 5.8 times, sales are still growing, EBIT margin of 19.9% and ROE still respectable at around 14%. It is a rarity among Canadian public companies with strong margins, brands and sales strength throughout the economic cycle. U.S. competitors continue to sell at well over twice their multiple.

 

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[premfan]

Looks like a growth company selling at a value price.

[tombgrt]

Why are they able to obtain such high margins? Do you think they are sustainable? What are the averages? I don't know the brands and know nothing about the sector.  :-X Do new products go through a lot of testing etc?

 

Convertible debentures don't seem too dilutive, debt is manageable, management seems to be doing the right things, ...

[Cardboard]

Regarding the "moat", I think that you guys will need to get your own feel for it. IMO, the margins are high because they have focused on the health care practitioner channel vs mass distribution. These margins should actually go higher as they complete the implementation of their ERP system.

 

They sell vitamins and health supplements which I consume none, but many people do and many people like to use "natural" medicine. So once these people go to their naturopath and get a recommendation for a certain product with a brand name, they are likely to stick to it for a long time. It is kind of like big pharma except that there is not as much science around it. So patents are not so important, but more brand recognition and confidence in the quality of the product. It is not the same case as an insurance company forcing you to switch from Lipitor to a generic.

 

One concern from analysts is the increase in legal cost and regulation. Actually, Atrium has been anticipating and kind of wishing that for years since many of their smaller competitors would go away being unprepared. GMP has also been a focus for them. While I can't verify all their statements, I would imagine that it is true looking at the strength and depth of their board of directors which is quite unusual for a company with only $414 million in sales. I doubt that some of these people would accept to sit on the board of a company where their reputation could get hurt in any kind of way.

 

My main concern with the company has been around return on capital. It is not bad, but not stellar either since a lot of their fast growth has been done through relatively expensive acquisitions. These guys like to retain former managers to run the businesses so the price paid is "fair". However, most acquisitions have turned out to be pretty good and free cash flow generation is strong. I think that they have realized that in 2011 by starting to buyback their stock. One guy on Stockhouse actually pointed out what could be accomplished over a few years by simply growing organically and buying back their stock which always look undervalued.

 

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[bathtime]

It was timely of you to bring this to the board's attention. Hope someone picked up a few shares as it's hitting $10.80 today. I didn't have the conviction to hold after dipping my toes in the water.

 

I know this is a value board, but I find this technical tool from Bill Cara (smart Canadian financial blogger) quite useful:

 

http://rsi.caracommunity.com/RSIApp/RSIApp.html#atb.to

 

The idea is that an opportune buy point may be presenting itself in a stock when the D/W/M RSIs are below 30 (i.e., oversold on a long term basis). When the Daily RSI ticks above 30 after the preceding conditions have been met, a buy signal is issued. It's surprisingly effective at timing the bottom in my observation. Certainly more so than catching a falling knife. It triggered on ATB.TO at $10.09 the other day. Off the top of my head I remember that I've seen it work on XOM in the 50s, QCOM in the 30s, RRC in the 30s, recently CFP.TO in the low 9s. I don't remember well enough, but it may have caught BAC in the 5s too.

 

BTU will be an interesting test as the coals are very oversold, but some analysts are saying things fundamentals will get worse. A buy was triggered a few days ago.

[ValueLad]

This is one of my largest positions, and like you Cardboard, I'm scratching my head. It's a high-growth story, low multiple to earnings, and an impressive board (I followed Alain Bouchard but am not familiar with the other name you mentioned). Also, their acquisitions seemed reasonable to me. I don't see the latest one as any different from those in the past. They've done a great job (and will continue to do a great job) with cross selling their acquisitions through different distribution channels.

 

I think the pending regulations in the U.S. about possible NDI (new draft ingredient) regulations are hurting the supplement companies. However, as you pointed out, Atrium's products are science-grade & very high quality.

 

I'm keeping my position & just chalking it up to regulatory uncertainty. There has not really been any regulation of supplement companies in the past and it seems they can claim a lot with their products (ex: will help you lose weight!) without it being checked by the FDA. I don't think the FDA will kill this business so I'm a happy owner.

 

Here's an article of them contacting the FDA:

http://www.naturalproductsinsider.com/news/2011/12/atrium-innovations-ndi-draft-guidance-violates-ds.aspx

[Cardboard]

It has taken a long time but, this company is finally seeing a fair valuation with this takeover bid.

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aATB-2127872&symbol=ATB&region=C

 

There is also a 45 day period where they will be able to entertain a higher offer which I think is quite possible considering that acquisitions (this year) in that sector were made at much higher valuation levels. The main risk on that one seems to be about conditions that the Quebec government may call for. Notice how many times it is written in the press release that the HQ will remain in Quebec and how important Quebec is to them and all that blah blah blah!

 

Cardboard