First up, this is a highly speculative nano cap stock with additional risk and zero liquidity.
Nonetheless, with huge opportunities for growth and hidden asset value suggesting the stock trades at a 33% discount to net tangible assets, Schmitt Industries’ (SMIT) story is one that should be of interest to both growth and value investors. In summary the thesis based on;
- Rapid growth in remote tank monitoring protected by patented intellectual property and with huge total addressable market
- Zero debt and over depreciated property results in stock price discount to (hidden) asset value
The company has a number of product lines that are growing at a healthy rate and discussed below. But for the moment let us concentrate on the juicy bit. Xact sensors currently only account for 20% of revenues but it’s growing rapidly and has huge potential.
Xact sensors allow the precise monitoring of tank fill level information, e.g. Propane or Diesel, at any location. There are many applications for this technology – however a typical example would be telecommunication towers based in remote areas that rely on backup power from diesel generators. It is essential to monitor the fuel tanks for the generators to ensure that fuel levels are sufficient to sustain the tower in an emergency, and also to detect sudden drops that could indicate fuel theft. The cheapest and most efficient way to do this is through remote sensors.
Schmitt Industries were granted a patent in 2012 for its ultrasonic liquid level monitoring system (Xact) and have a further patent pending for event monitoring. Product break out is not provided on a quarterly basis but it is available in the annual report which shows Xact’s revenues increased from $0.877 million in 2013 to $2.437 million in 2017 representing a CAGR of 29%. Importantly the annual growth rate increased to 37% in 2017 suggesting that this growth is accelerating.
Such strong growth is meaningful and exciting. The potential global market for remote tank monitoring is huge with applications in various industries including oil and fuel, chemical, mining, agriculture and automotive. Some commentators estimate the market will grow annually by 6% to reach $859 million by 2020. If Schmitt can win even a tiny share of this with its intellectual property protected business then there could be huge upside. OK, I hear you say, that’s great but its a bit of a long shot for a nano cap – what happens if it fails completely. Well again the stock looks like a bargain. However proving it involves a lot of numbers so I have put the detail below and just do the summary for now.
Schmitt has zero debt and a market cap of $5.87 million which looks cheap compared to a book value of $6.98 million. Now to be conservative we need to exclude intangible assets of $0.6 million and haircut both the accounts receivable and the stocks as the realisable value in a wind up situation would probably be less (lets assume 50% for accounts and 25% for stocks). However, and here is the kicker, we also have to check if there is any hidden value in the property as real estate values are much more resilient (as property has many alternative uses) and rising prices in a strong property market coupled with depreciated accounting values means that we can often find hidden value.
This is exactly the case with Schmitt. Based in Portland Oregon, Schmitt owns outright 40,000 square feet of real estate and has benefited from a strong property market. The company recently listed its 10,000 square foot Headquarters for sale for $2.7 million suggesting the property on the balance sheet (valued at $0.865 million) has been overly depreciated. Additionally the company has a further 30,000 square footage of property in Portland. If that property is conservatively valued at half the price of the HQ it would be worth $4.05 million.
In fairness the company didn’t sell it’s HQ in the end but the value looks achievable in a thriving market. Portland was recently ranked as the 39th best (out of 300) real-estate markets in the US by WalletHub based on long-term growth, equity and profit.
So taking these tangible assets with discounted stocks and receivables and adding the revalued property assets and we get an estimated asset value of $9.85 million. Deducting total liabilities of $2.03 million we get a net figure of $7.82 million compared to its current market capitalisation of $5.87 million. That’s still a discount of 33%. Not bad for a downside scenario.
Please remember, again, to be careful. This is a nano cap stock with additional risks, zero liquidity and at best is highly speculative. This is not a recommendation to buy or sell. Stocks are not suitable for all investors. Please do your own research.
Finally business summary provided below for those who are interested.
Schmitt Industries has a fairly simple business following its decision to focus efforts on three major product lines – SBS, Acuity and Xact. In summary the three product lines make sensors to monitor
- SBS -- Tool manufacturers need to ensure precision in their manufacturing processes and an unbalanced grinding machine will lead to poor quality products, will be inefficient from a cost perspective and ultimately can be damaging to the equipment. SBS sensors monitor the vibration of grinding machines to optimise production.
- Acuity produces dimensional and positional measurement sensors. These are required for a wide variety of industrial and commercial applications. Forest products companies use Acuity sensors for measuring the size of logs and lumber. Steel mills use Acuity lasers to measure the width of continuously-cast hot steel. Semiconductor manufacturers use sensors to precisely monitor the position of components.
- Xact sensors allow the precise monitoring of tank fill level information, e.g. Propane or Diesel, at any location. There are many applications for this technology – a typical example would be telecommunication towers based in remote areas that rely on backup power from diesel generators. It is highly important to monitor the fuel tanks for the generators to ensure that fuel levels are sufficient to sustain the tower in an emergency, and also to detect sudden drops that could indicate fuel theft.
The elimination of smaller lines has been a drag on growth but the efforts are now beginning to pay dividends as revenues increased 6% ($0.712 million) to $12.4 million in FYE May 2017. Revenues in the Q4 increased 22.5% to $3.65 million with stronger sales in both North America and Asia being cited.
Submitted September 10, 2017 at 09:10AM by InterestingNews1 http://ift.tt/2xonRmi
