Sal H. Alfiero is turning into a bargain-hunter.
That's a far cry from Alfiero's approach a decade ago, when the chairman and chief executive officer of Mark IV Industries Inc. used a series of hostile takeovers, financed by junk bonds, to turn the Amherst manufacturer into a Fortune 500 company with a wide range of products.
But these days, Alfiero is doing a different kind of buying. For the last couple of years, nothing has looked like a better buy to Alfiero and Mark IV's other top executives than the company's own stock.
That's why they've shelled out more than $350 million since March 1997 to buy back roughly 19.5 million shares of Mark IV's battered stock. At an average price of just under $19 per share, Alfiero says it was too good of a deal to pass up. So by the end of last week, Mark IV had gobbled up close to 30 percent of its own shares.
"We feel our own securities are our best acquisition," Alfiero said.
"What company do I know better than my own?" he said. "If my company is selling at such a discount to the other companies in my industry, why wouldn't I want to buy my own stock?"
To give the company the money to pay for all that stock, Mark IV has been steadily shedding some of the far-flung businesses that don't fit in with Alfiero's more focused vision on what automotive and industrial products it should make.
That process continued last week, with Mark IV selling three industrial filtration products businesses to Clarcor Inc. for nearly $145 million. In all, Mark IV has raised $460 million by selling some of its non-core businesses during the last eight months, including a $276 million deal in February to sell another chunk of its Purolator automotive filter business to Arvin Industries Inc.
"That clearly has been working well," said John B. Walthausen, an analyst at C.L. King & Associates in Albany, who thinks the filtration business was more valuable when split off in parts than it would have been in Mark IV had sold it as a single package.
Sure enough, Alfiero said he plans to use the proceeds from the latest sale to buy back more stock and pay off another chunk of the $126 million that's still outstanding of its highest-cost debt, a series of notes that pay 7.75 percent interest.
It's all part of a plan to spruce up Mark IV's debt-laden balance sheet, which still is a lot prettier than it was a decade ago, when the company's debt accounted for nearly 90 percent of its total capitalization.
But times changed, and so did Mark IV. As the takeover boom went bust in the early 1990s, Alfiero and his colleagues became more conservative. Instead of hostile takeovers, they made a series of friendly deals, and the company that junk bonds built started coveting investment grade status for its debt.
Alfiero and his colleagues worked hard during the early 1990s to pay down that debt, and even succeeded in earning an investment grade credit rating for a while. But Mark IV lost its investment grade rating on its debt as its borrowings began to rise again in the second half of the '90s.
In fact, debt continues to be a big issue for Mark IV. After trimming its debt-to-capitalization ratio ratio to a low of 41 percent in February 1997, it started rising steadily again, peaking at 60 percent in May. The latest debt repurchases, coupled with the company's rising share price, have pushed it back down to 56 percent today.
Alfiero said last week he'll be happy as long as total debt stays somewhere between 40 percent and 60 percent of Mark IV's total capitalization.
"We're fairly comfortable, and we feel it gives us a lot of room to move," he said.
The debt-laden balance sheet helped turn off many investors, who also didn't care for the company's high capital costs and Mark IV's diverse operations in an era that favors firms that are tightly focused on what they do best.
As a result, Mark IV's stock, which had been a darling of Wall Street throughout most of the 1980s and early '90s, actually fell at a rate of nearly 6 percent a year from 1995 to 1999, even as the Standard & Poor's 500 was soaring by a 30 percent annual rate.
"Clearly, I think it's a good idea that they focus on their core business," said Christopher Carosa, who manages the Bullfinch Funds' Western New York Series mutual fund, which owns Mark IV stock. "I think you want to clean up your balance sheet first."
So Mark IV set out two years ago to cut its costs and revamp its manufacturing operations -- a process that took longer than expected and hurt the company's profits during the last two fiscal years.
But now, the company is reaping the benefits of the changes, with the cash flow generated from its operations rising by about $200 million during the fiscal year that ended in February, although Alfiero conceded that the results weren't quite as good as Mark IV executives had hoped.
"The balance sheet is in significantly better shape," Alfiero said.
Because of those changes, as well as renewed interest by investors in medium-sized companies, this year has been much more kind to Mark IV's stock. The shares are up about 65 percent from their low of $12.13 on Dec. 17.
"They're doing the right things," said Brad McAdam, the research director for the Bullfinch funds. "If they believe the stock price is undervalued, then buybacks would be an appropriate use of their cash flow."
Gary Schneider, an analyst at Bear, Stearns, has said buying back stock may be the best way for Mark IV to use its money as long as the shares sell for less than $28 per share.
That doesn't mean Mark IV is bowing out of the acquisition hunt, though. The company, which spent $148 million this spring to buy Italian diesel engine maker Lombardini FIM Spa, still is looking for purchases that will complement its automotive and industrial products businesses, Alfiero said.
"I see us making strategic acquisitions, and they probably will be modest-sized acquisitions," Alfiero said. "There probably won't be any blockbuster acquisitions."
In fact, an Italian newspaper reported last week that Mark IV is close to acquiring another small diesel engine maker in Italy, Ruggerini Motori, which has annual sales of more than $30 million a year.
In the meantime, Mark IV is sticking to its knitting, concentrating on its main products, such as belts, hoses, power transmission and fuel systems, along with air intakes.
"Our auto business is up," Alfiero said.
Mark IV's replacement auto parts business, which was restructured last year to eliminate less-profitable products and reflect the fact that original equipment now lasts longer, also is starting to strengthen, he said.
The company is particularly optimistic about a new line of universal automotive tensioners that can replace products made by a host of other manufacturers and is planning to expand its production capacity within the next year to 18 months, said William P. Montague, Mark IV's president. Tensioners are the devices that are used to keep engine belts, such as drive and timing belts, taut.
Mark IV also is close to opening a new plant in Montreal that will make light-weight, nylon air intakes that will replace the conventional metal intakes that most domestic auto makers now use. While Alfiero said Mark IV faces competition for this business, the company still hopes it will bring in $80 million to $100 million in annual sales within three to five years.
Those new products, coupled with Mark IV's surprisingly strong second-quarter profits last week, prompted Harriet C. Baldwin, an analyst at Deutsch Banc Alex Brown, to repeat her buy rating on the stock and raise her target for the shares to $25.
Alfiero also thinks times may be improving for its industrial business, which was stung by soft markets in Europe and Australia, as well as depressed farm, mining and petrochemical markets. "We're seeing signs of bottoms in the agriculture markets and the mining markets," he said. "The petrochemical area is beginning to come back" because of rising oil prices.
And for Mark IV, the worst may be over, too.