Aldila, Inc. currently sells for about 7x last year’s earnings and yields 4% and has about $3 per share in net cash with no debt on its balance sheet. After reaching $35 per share about one year ago, ALDA now trades for about 40% of its peak market value on the back of disappointed growth investor selling.   This disappointment has settled in and I believe today’s level represents a good entry point.

 

Rather than re-word what the company’s filed description, the following is the basic business description section from their 10-K for a little background:

 

“Aldila, Inc. is a leading designer and manufacturer of high-quality innovative graphite golf shafts in the United States today.   Aldila enjoys strong relationships with most major domestic and many foreign golf club manufacturers including Callaway Golf, TaylorMade-adidas Golf, Ping and Acushnet Company.   The Company’s current golf shaft product lines consist of Aldila branded and co-branded products designed for its major customers and custom club makers, as well as custom shafts developed in conjunction with its major customers.  These product lines are designed to improve the performance of any level of golfer from novice to tour professional.

 

Most golf clubs being sold today have shafts constructed from steel or graphite, although limited numbers are also manufactured from other materials.  Graphite shafts were introduced in the early 1970’s as the first major improvement in golf shaft technology since steel replaced wood in the 1930’s.  The first graphite shafts had significant torque (twisting force) and appealed primarily to weaker-swinging players desiring greater distance.  Graphite shaft technology has subsequently improved so that shafts can now be designed for golfers at all skill levels.

Unlike steel shafts, the design of graphite shafts is easier to alter with respect to weight, flex, flex location and torque to produce greater distance, increased accuracy and reduced club vibration resulting in improved “feel” to the golfer.  The improvements in the design and manufacture of graphite shafts and the growing recognition of their superior performance characteristics for many golfers compared to steel have resulted in increased demand for graphite shafts by golfers of all skill levels. The initial acceptance of graphite shafts was primarily for use in woods.  According to the 2006 U.S. National Consumer Survey conducted by The Darrell Survey Company, graphite continues to dominate the professional and consumer wood club market, with over 98% of new drivers purchased in 2006 including graphite shafts.   In Hybrid clubs, 76% of the new clubs purchased had graphite shafts up from 65% the previous year.”

This stock has been written up before on VIC.   For more background info you can refer back to the two write-ups on Aldila by VIC members back in May 2006 (by leo991) and also as far back as November 2004 (by pokey351).   As you’ll quickly notice, the November 2004 idea posting was done when the price was $12 and Aldila was just catching a wave of investor optimism with their then new NV shaft sales hitting on all cylinders.  It was a huge success, obviously.  The stock rose to about $35 per share by June 2006.   The May 2006 idea posting marked the high point of optimism and now about one year later, the stock is less than 50% off its high. 

 

The interesting thing about the two previous write-ups on ALDA is what has happened to the company fundamentally during the interim years.  Back in 2004, as leo991 very accurately pointed out, Aldila was just starting to benefit from the dual affect of increasing unit salesand wonderfully increasing pricing trends.  Since June 2006, the exact opposite has occurred in a kind of unwinding fashion.  It happened quite rapidly and caught investors by surprise.   

 

I believe that with the last two quarterly reports Aldila’s business has shown some stabilizing trends and this unwinding affect is grinding down.  My opinion is that stock is now cheap enough to make some money over the coming years.   Please note that I am not arguing that pricing trends are going to return to their heyday or that unit growth is going to take off as it once did.   However, I am arguing that at today’s price of $14.75 per share represents a good entry point for the stock.

 

As a way of giving you a sense of what I am seeing as attractive in ALDA, the following are clippings from various sources over the past year or so.  This seems like a reasonable way to convey my thoughts and interpretations.

 

 

Aldila pays a $0.15 per quarter dividend which represents a 4% yield at current prices.

They have no debt and about $18 million in cash on the balance sheet.  This equates to a net cash position of over $3 per share.  At some point they may do a large buyback, special dividend or other value enhancing moves.  They’ve mentioned the possibility on the last call – see below.

Aldila reported net sales of 17.9 million for the fourth quarter ended December 31st, 2006 as compared to 18 million in the same quarter of 2005.  This shows a second quarter of stabilization.  I hope this continues, of course.

Our average selling price of golf shafts declined 12 percent in the 4^th Quarter of 2006, while units sold increased 14 percent as compared to the fourth quarter of 2005.   This compares with the 2^nd Quarter 2006 in which the average selling price of golf shafts decreased 9% quarter on quarter and on a 21% decrease in unit sales. 

They introduced our VS Proto shaft line on Tour in January of 2006 and began sales in May of 2006.  Their sales of the VS Proto shaft line have exceeded the first year sales of their NV shaft line.  The NV and the NVS lines continue to enjoy significant sales and have emerged as a leading premium shaft line for the European club market that tends to lag the US market.

From the 1^st Quarter press release: “Our Vietnam factory has begun operations and will ramp up its production during the remainder of the year and will take on significant production in 2008.  With this new state of the art factory we believe we are set with enough Asian capacity to allow us opportunities to grow our unit sales long term,” said Mr. Mathewson.   My note: this is clearly weighing down profits right now with the likely benefits to show through in 2008.

Poway, CA, July 28, 2006 — ALDILA, INC. (NASDAQ:NMS:ALDA) announced today that its Board of Directors has authorized the repurchase of up to $5,000,000 of the Company’s common stock.

 

2^nd Quarter 2006 #s:  Branded and co-branded golf shaft sales together represented 53% of our golf shaft sales in the current quarter as compared to 56% in the comparable quarter last year. 

 

3^rd Quarter 2006 #s:  Branded and co-branded golf shaft sales together represented 38% of our golf shaft sales in the current quarter as compared to 58% in the comparable quarter last year.

 

4^th Quarter 2006 #s:  Their “branded and co-branded” sales together represented 39 percent of golf shaft sales in the fourth quarter of 2006, versus 68 percent in the comparable quarter last year.

1^st Quarter 2006 #s:   Branded and co-branded golf shaft sales together represented 53% of our golf shaft sales in the current quarter as compared to 57% in the comparable quarter of last year. 

PETE MATHEWSON:  Well I think we’re somewhat optimistic for the equipment year (ph) in ‘07 because we didn’t see a strong year in ‘06, and especially we didn’t see a strong year in driver sales which is a key category for us.  We look at the offerings that are out there for this season in drivers and I think it’s the best lineup we’ve seen in a number of years and the big story there is the new technology in what they call high MOI drivers or square drivers.  That’s essentially a whole new category being created.  If the consumer embraces that technology it could be very meaningful to our business because increasing driver sales is good for us, without a doubt.  Most of the drivers in that category are being sold at higher price points, that’s a good thing too and we really think that club companies need to somehow figure out a way to move that price point up which would also allow for higher priced shafts to go into those drivers.  So overall, you know, and we also had a, we’re seeing, you know, the units were up in the fourth quarter.  We think that trend very likely will continue into ‘07, so I think we’ve got a good chance of selling more overall units this year than last year.  So overall we’re cautiously optimistic about the equipment side of things and the golf industry in general.

PETE MATHEWSON:  OK.  We come out with this, let’s use the NV as an example.  The NV comes out and at some point in its life we decide that we want to co-brand it.  The OEMs are very price sensitive, a lot of them can’t see their way clear to use the NV at its higher selling price as a shaft or a major program, but they can at a reduced price or that’s where co-branded comes in.  So typically we take it like an NV and we modify it, get it to where it’s to a price point that they can work with, but still utilize the brand’s strength of a shaft model.  So it’s, and we typically enjoy pretty good margins on those as well, not as high as the original NV, but still better than an OEM production shaft.  And that was part of our success without a doubt is heavy co-branded opportunities with the NV, and really where we’re caught right now is the NV and the NVS was used extensively in ‘04 and ‘05 and ‘06 in co-branding opportunities and started slowing down in the second half of ‘06.  We don’t really have anything new to offer them in the co-branded side of things, like the VS Proto has not been offered so far as a co-branded shaft.  We’re pretty certain we’re going to start offering that in the back half of the year or it would start to appear in the back half of this year.

PETE MATHEWSON:  Well part of it is to let the shaft mature a little bit, these things take a little bit of time to gather momentum and so you typically wait.  It’s only been on sale in the market since May of ‘06, so it’s still a pretty new shaft line.  If we decided to start offering it co-branded it won’t show up in the club, in the marketplace till let’s say late this year at the earliest.

BOB CIERZAN:  We spent 4.5 million last year, we had said we would spend 5.5, you know, so there’s probably a million overlap and most of it due to Vietnam into 2007.  We’re going to put in new tape line as Pete said in 2007, so we’re probably going to spend somewhere around 5.5 million, again, would be the target.  After that, you know we still pay a dividend and the board of course will discuss what to do with any excess cash buildup.  In the past they have, they declared a couple of special dividends if they saw no use for that cash or I’m sure they will weigh it against buying back shares depending on the price.

Ping, Acushnet Company and Callaway Golf, who collectively represent approximately 51% of the Company’s net sales in 2006, each purchased from at least two other graphite shaft suppliers.

The Company’s average selling price increased by approximately 70% for the year ended December 31, 2006 as compared to the comparable period in 2002.  However, the Company’s average selling price decreased by 6% for the year ended December 31, 2006 as compared to the comparable period in 2005.  My note:  this is the unwinding and I don’t expect that they will catch lightning in a bottle again.  The stock isn’t priced for this necessity.

 

The average selling prices of “branded and co-branded” shafts were seven percent, and one percent lower respectively in the first quarter of 2007, compared to the first quarter of 2006.  My note: this trend has not yet turned around so this is still a concern.

 

From 1^st Quarter 2007:  While revenues were strong in the quarter, our margins suffered from our shaft mix, higher material costs, and our new Vietnam factory that is operating but not yet contributing meaningful production.  We are seeing an increasingly competitive environment, as the worldwide shortage of carbon fiber eases.  We believe our competitors are no longer seeing the shortage of carbon fiber material that benefited us over the last couple of years.   My note: of course, this is a commodity business and ALDA has not yet, nor will it ever completely, move in a fully branded shaft mode with higher margins.  I do like their vertically integrated manufacturing posture as a competitive advantage.  It just doesn’t mean much right now as it did a few years back.