Aceto (NASDAQ:ACET) is an odd duck. Classified in the past as a "specialty chemical" company, Aceto has indeed sold a range of products like nutritional ingredients (vitamins, amino acids, etc.), active pharmaceutical ingredients, pharmaceutical intermediaries, dyes, resins, agricultural productivity chemicals, and so on. What's different is that Aceto's expertise has never been in developing or manufacturing them, but rather working with customers to understand their needs, assembling third-party manufacturers, overseeing regulatory and quality control functions, and handling the marketing and distribution. It's a curious model, but it is one that has allowed the company to generate decent returns on capital, pay a cash dividend for close to 30 years, and beat the S&P 500 over the past decade.
Over the past couple of years, management has sought to more actively change the business, using the company and product acquisitions to shift ACET more dramatically toward generic pharmaceuticals (albeit with basically the same asset-light model). Given the higher margins that go with generics and the ongoing growth in pharmaceutical consumption in the U.S., this seems like a credible approach. Aceto is barely covered, though, and much to my own surprise, these shares look as though they could be undervalued.
Aceto Shifting Its Unusual Model Toward Generics