STABLEBOY SELECTIONS

American Locker Group is a manufacturer of coin- and key-controlled lockers. In early 2005 the company lost a mailbox supply contract with the US Postal Service, which amounted to half of its 2004 revenue. Shares fell 66% as management delayed SEC filings and recorded a substantial goodwill impairment charge.

ALGI spent the rest of 2005 closing unnecessary facilities, relocating corporate headquarters and halting new pension benefits. This reduction in SG&A expenses successfully tempered the loss of revenue. In 2006, a year with virtually no USPS sales, ALGI earned $640,000 after tax. (True profitability is actually greater since depreciation was $400,000 versus $100,000 in capital expenditures.)

According to its Form 10-K, ALGI has solid financial strength. Most of the current assets consist of cash and accounts receivable, and NCAV is greater than $5 million. This is only slightly less than the company’s $5.8 million market cap, so anyone who buys now will pay almost nothing for land, buildings and machinery. Of course, buying at a discount to asset value can only limit an investor’s loss—it will not provide upside unless he is liquidating the business.

Shareholders will do very well if the company regains approval to manufacture mailboxes for the USPS. To get an idea of how much this would increase earning power, see income statements from 2001 to 2004 when the contract was in force. If we assign a 50% probability to approval, ALGI has a high mathematical expectation.

Earnings will likely improve even without sales to the USPS. ALGI’s Board of Directors have bulked up management, overhauled production processes and focused on new products. Gross margins in 2006 were actually higher than in 2004.

While the intrinsic value of ALGI is difficult to estimate, we know it’s somewhere between the current market cap (buttressed by NCAV) and a whole lot.