The case for Apollo It's not hard to imagine that the story of Apollo Health could someday be a script for a Hollywood movie….a movie that i believe will become a financial blockbuster for my portfolio and potentially yours as well. Here is your private pre-release screening for your review.
The story begins in 1993 when two handsome entrepreneurial Canadian brothers start Apollo Health and Beauty Care. Richard and Charles Wachsberg built Apollo (a private/white label manufacturer of health (skin care, soaps, body wash) and beauty products (shampoos) into a very profitable and successful company which was widely recognized as a quality well run enterprise. After 23 years the Wachsberg brothers agreed to sell the company to a group, whose organizers were a who’s who list of all star Canadian business titans. The acquirer Acasta Enterprises, was a newly public SPAC (Special Purpose Acquisition Company). The bios and accolades of the organizers of Acasta could fill pages, and did fill pages in the prospectuses at that time. Everyone said that Acasta was a can’t miss offering. They raised almost ½ billion dollars (CAD) on an oversubscribed IPO. The champagne was flowing in Toronto!
What could go wrong?....well as it turns out…. Everything! The financial destruction caused by the Acasta All-Stars happened so fast and was so complete that it took only two years to occur...from 2016-2018. The obituary shows failed acquisitions of an aviation finance company (Stellwagon), a dish and laundry soap company (Jempak), and the inversion of Apollo from a very profitable company to a loser. The explanation of the cause of this destruction could fill volumes….but i would venture to say that egos, hubris and incompetence of the expert All-Stars played a large role. In less than two years, Stellwagon and Jemtek were gone, and Apollo was the lone damsel in distress tied on the train tracks at the climatic part of the movie. But like all good movies, the heroes arrive just in the nick of time. In early 2019, Richard and Charles Wachsberg reclaimed control of the only thing left of Acasta….their battered baby, Apollo. The road to recovery would not be easy. There was debt, low margins, and bloated expenses among other problems which had to be fixed.
Then came Covid. Covid was the rocket fuel that has since sent Apollo to the moon! Apollo was able to ramp up the hand sanitizer line and the sales of its customer base which includes Walmart, Target, CVS and thousands of independent grocery stores were exploding. With Richard and Charles Wachsberg at the helm, Apollo executed flawlessly in q2 and q3 2020, expanding its geography and customer base and posting tremendous sales, huge margins and fat profits. After just 3 quarters in 2020, Apollo has earned .78 per share and paid off all of its debt (65 million).
Q4 could be the best quarter yet. It will likely push them well over $1.00 in earnings which would give them a trailing P/E of 4-5...and a forward EPS of 1.50 or so.
So this is another Microcap “no-brainer” right? Trailing EPS of $1.00 should merit at least a 15 PE and the stock should be valued at minimum somewhere between $15-20….yet the stock only sells for $5.00 (CAD)! Why?
My honest answer to this is i don’t know….it’s mispriced.
But since i am writing this for others, who are still evaluating the investment, i will offer some speculative guesses as to the reason the share price does not appear to reflect a higher value.
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Reason #1- Lets call it the Covid BUMP. The pessimists argue that the sales and margins of the hand sanitizers and other COVID related panic buying are not sustainable and sales and margins will soon return to pre COVID levels.
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Reason #2- The stock price already increased 10-20 times in 2020...so how can it go higher?
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Reason #3- Lack of Information/Disclosures - The Company does not do investor presentations, conference calls, issue press releases, or even update its website. Some investors may not be comfortable investing without knowing many more details that similar companies routinely provide.
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Reason #4- Capacity - Sales have been growing so rapidly, that they may be at manufacturing/supply chain capacity which may impede continued growth.
While
Capacity
Bump and
Disclosure
are issues to consider i do not think that they are enough to justify the low valuation.
But while we are talking about CBD and Apollo, i don’t think you have to be smoking something to believe that CBD infused beauty products could be a huge driver of future growth for Apollo. A little over a year ago they received permission from the Canadian Government to begin research into the use of CBD in Apollo’s products. Beauty products and CBD seem like a marketing match made in heaven and I believe that Apollo will deliver innovation in this area.
If you are still not convinced of the beauty of this investment, you should still take a peek at the warrants. The warrants, which currently sell in the .30 (CAD)cent range, expire Jan 3, 2022 and have a strike price of 11.50 (CAD). I am by no means an expert on options/warrant pricing but it seems to me that a .30 cent time premium for one year is ridiculously low. If Apollo was priced at 15 times trailing EPS the warrant would be $3.50 in the money...that is 10 times your money! If you are an optimist and believe that COVID will be gone by 7/1 that still leaves 3 monster COVID quarters of earnings to drive enterprise value. The risk reward on the warrant seems compelling.
In summary, Apollo Health and Beauty has the “right stuff” at the right time. Great management, essential products, great margins, profits, no debt, healthy customers, continued rise of private label, on shore (North American) manufacturing. This company is worthy of a place in your portfolio.