This report was originally published on 6/24/09.

Since reaching its YTD high of $10.11 on June 5, ARP shares have witnessed a 20% correction. At today’s price, ARP shares now sport a free cash flow (FCF) yield of 20%. After generating $20 million in FCF in the first quarter, we think ARP is well on its way to generating $70+ million in free cash flow for 2009.

The American Institute of Architects (AIA) released their Architecture Billings Index (ABI) for May 2009 today. The ABI is a solid indicator of non-residential construction with a lag of 5-6-months. Here are the highlights of the release:

• The overall billings index remained flat from April at 42.9
• The index for new project inquiries decreased slightly from 56.8 in April to 55.2 in May

As we outlined in a prior post, any score for the index below 50 implies that firms in the aggregate are reporting a decrease in activity from the prior month. The overall index has remained in the 42-43 range for three-months now, which would imply activity has weakened slightly. However, the new billings index has been in the 55-56 range for the past three months, which suggests that overall activity levels could increase substantially in the next 3-6 months. The chart below displays the ABI Index and the new project inquiry data for the past two and a half years (click on chart for full image).

Source: AIA

In our original post on ARP we characterized the company as a “cash cow”. The recent stabilization in the AIA’s new project inquiries index suggests activity is poised to increase in the next few months. ARP trades at a meager 10.9x our FY09 EPS estimate and now has a FCF yield of 20%. Our EPS estimate is based on our forecast for a revenue decline of 16% for ARP in FY09. Our assumptions are starting to look increasingly conservative based on the Architecture Billings Index and recent feedback from reprographers which suggests business trends have stabilized or improved in the second quarter. We expect ARP to use almost all of its FCF from 2009 to repay debt, which should position the company to pursue strategic tuck-in acquisitions and increase investment in its digital platforms in 2010.

Assuming ARP generates $70 million+ in FCF in 2009 that would represent more than $1.55/share. At a 10% free cash flow yield ARP would trade at $15-$16/share.

As always, please act accordingly…