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Saturday, July 02, 2011


AAON (sec)

I owned stock in this company back around 2000 to 2002, and revisited back in 2006.  Very solid air conditioner company.  If I recall, Wal*Mart used them because they were very cost effective over their lifetime, although the initial price was fairly high.

Looking at the stock chart, this was definitely a good investment at that time. 4-bagger plus when the market went nowhere.  Back in 2006, I said that I had correctly sold them at full value in 2002.
If these guys get slammed by a downturn with skyrocketing commodity prices, it might be worth looking at again.
[rubbing hands together] And here we are!

The problem is that they seem like they're selling at full price right now.  Perhaps that will change.

Looking at the 10-K.

16.5 million shares.  Two companies: AAON, Inc (Oklahoma!) and AAON Coil Products, Inc (Texas).

Same businesss that I remember: rooftop air conditioners, chillers, heat recovery units, condensing units, etc.  Almost all domestic US.  Half the business is replacement units.

Business is cyclical, lags housing starts by about 6-18 months.  14% estimated rooftop share. 1% coil market share.  No more major customers (aka Wal*Mart), which is good.  No major vendors, also good.

They negotiate terms for raw materials and purchased components 6months to 1 year ahead.  Small sales staff.  They focus on higher quality and have higher initial cost.  I'm guessing that with high or unpredictable energy costs, this is now an easier selling point.

March 2011 Backlog is somewhat higher than last year.

Competitors: Lennox International, Ingersoll Rand, Johnson Controls, United Technologies. All of them are bigger than AAON.

No unions.

Business is down now due to the down economy.

Semi-annual varying dividends since 2006.  Stock buyback in 2010 (up to 5%).

Revenues, diluted earnings per share
2006: $231 million, $0.90
2007: $262 million, $1.22
2008: $279 million, $1.60
2009: $245 million, $1.60
2010: $244 million, $1.30

Current stock price is $22.17

Stock count steadily dropped during that time from 19 million to 17 million.

Wow, total debt during this time started at near-zero, climbed to $3 million in 2008 and then declined back to zero.  Good show.

Commodity prices are all over the map.  Steel dropped  34%, aluminum up 155%, copper up 210% (this is particular tough for them) from 2008 to end of 2010.  They bought a derivative to hedge against copper in 2009, settled Dec 2010.

Gross margin, operating margin, net margin
2008: 24%, 15.5%, 10.2%
2009: 27%, 17.8%, 11.3%
2010: 22%, 13.4%, 9.0% (not too shabby, given the situation)

Grant Thornton auditors (sounds familiar), non-qualified opinion.

Good balance sheet, but low on cash.  PP&E half depreciated.  Not much on the liabilities side. $33 million inventories out of $160 million total assets (depreciated).

They use the revolver a lot.  Bank of Oklahoma, $15.2 million LIBOR + 2.5% (4.0% end of 2010).  Expect to renew July 2011.

Stock options seems reasonable.  Less than 1/2 million total outstanding.  Assume 17 million totally diluted shares.  Re-invested cash tends to buy down the share count, but let's not double-count that.

Cash flow looks good, but there's a fairly large capex in 2010.

Provisioning looks ok.

Looking at Q1:
Share count down slightly.
AR and inventory up a bit.
PP&E up $7 million, mostly machinery
Pulled $7 million out of the revolver

Earned 22 cents per share vs 30 cents (business is seasonal)

Gross margins down to 19.4% from 26.4% due to snowstorm (see below) and subsequent inability to heat the building.  Also rising raw material costs "that we were unable to pass on to our customers" and increase in mfg supplies related to increased sales(?).
Operating margins down to 10.1% from 16.6% (included additional trade show expense)
Net margin down to 6.1% from 10.45

Cash flow sucked vs last year.  Inventory increase (all raw materials) and liabilities.  Big capex $10 million.

Still expect to renew the revolver.

Expect to spend a total of around $30 million on Tulsa expansion.  Shouldn't require any debt.
Big snowstorm that they said wasn't a big deal in the 10-K (subsequent events) turned out to be a bit more.  Lost production for 8.5 days.

Released new production, set up new mfg lines in Tulsa (building addition).

Revenues up 22% due to "the favorable reception to our new products."


I viewed this as a good business each time I looked at it, and this time is no different.  If things get crazy and the stock gets clobbered because of it, I would expect to jump in and buy some.  I think the current price is about right, maybe even a bit low.

I figure it's worth around $25.

(NOTE: I also was looking at GWR back in 2006)


i assume the exclamation point signals that you're (1) a native oklahoman or (2) a steve martin / ruprecht fan (4:19 mark: http://www.youtube.com/watch?v=dX3ePAOUK7U&feature=related)

good to see the blog has roared back to life.
Actually it was (3) Oklahoma! the musical. I added a wiki link.
...although I now remember the humorous Ruprecht scene. Hehe!
Ah, should have guessed that. I know someone that loves that musical...
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