Flanders Finds Success With Filters

This report on Flanders was originally sent to subscribers of TheStreet.com Stocks Under $10 on March 7 at 1:56 p.m. EST and is being reprinted as a bonus to TheStreet.com readers. The Stocks Under $10 team added Flanders to the Stocks Under $10 model portfolio on that same date, and they continue to believe shares look attractive at the current price of $11.49. For more information on TheStreet.com Stocks Under $10 newsletter, click here.

Flanders(FLDR Quote), a Stealth Stock, hit our radar screen as a low-dollar way to play the steady demand for air conditioner filters. The company is one of the largest domestic sellers of air filters for use in heating, ventilation and air conditioning equipment, and users constantly replace filters, which leads to a steady stream of revenue and cash flow.

This stable market, along with some new-product launches, creates the potential for operating margin upside in the coming quarters. Plus, the stock is under the radar screen of most analysts, but growth opportunities abound that could generate investor interest in 2006 and beyond.

Customers of Flanders' products range from retailers to pharmaceutical companies to tech firms. For example, Wal-Mart(WMT Quote) and Home Depot(HD Quote) sell Flanders' products that are labeled with its partners' brand names, such as Lysol and Arm & Hammer. Pharmaceutical companies like Merck(MRK Quote) and Abbott Labs(ABT Quote) use Flanders' products to control cross contamination of dangerous chemicals in their facilities. Technology manufacturers such as Motorola(MOT Quote) use the air filters to help eliminate airborne contaminants to ensure strong production yields.

Flanders' revenue is generated mainly from low-margin filters, which are sold to consumers at about $1 each. However, the company is growing its branded revenue with product-development partnerships with household names such as Lysol and Arm & Hammer. These filters, such as its Lysol line, which includes an antimicrobial layer, sell for about $5 each, and Flanders captures a greater margin on the sale. In addition, the company offers higher-quality filters through its retail channel, which should provide the opportunity for incremental margin benefits.