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Opt-Sciences Corporation (OPST) deposits anti-glare and/or transparent conductive optical coatings on glass used primarily to cover instrument panels in aircraft cockpits. It also provide full glass cutting, grinding and painting operations which augment its optical coating capabilities. Most of its products are designed to enable pilots to read aircraft instruments in direct sunlight or at night or in covert situations using appropriate night vision filters or to protect the instruments from electromagnetic interference.
Valuation
OPST is currently trading at a trailing twelve months P/E of 12.69 and a trailing 12 months EV/EBITDA of 1.15. In terms of asset-based valuations, it is currently valued at 0.89x P/B and 0.94x P/NCAV. OPST achieved a 7.3% ROE for the past 12 months and a five-year average ROE of 6.6%. The metrics are distorted by the huge cash drag.
Financial and Business Risks
OPST is debt free with cash and cash equivalents of $9.7 million representing 89% of its current market capitalization of $10.9 million. Do take note that the $9.7 million in cash and cash equivalent comprises of $1.8 million in cash and $7.9 million in marketable securities. OPST claims that the marketable securities are mostly invested in a portfolio of income producing securities. OPST recorded an unrealized loss of $113,110 on its marketable securities in 2011 and an unrealized gain of $89,137 in the interim period for 2012. Interest income margin is estimated at around 2.4%.
OPST's business is highly dependent on the needs of new and used aircraft for new parts, spare parts, replacements and upgrades, which in turn derives demand from a robust commercial, business, regional and military aircraft market.
OPST's largest two customers accounted for 64% of 2011 sales. Sales tend to fluctuate from quarter to quarter, as all orders are custom manufactured and it schedules shipments based on a customer's requested delivery date.
Business Quality and Capital Allocation
OPST is the major supplier for the antiglare face plates covering the flat panel displays on the Boeing 777 and the 737 Next Generation models of commercial aircraft and the long-range Gulfstream and DassaultFalcon business jets. It is also an approved vendor for instrument glass used on several military aircraft platforms including the C5 Galaxy and the C130. OPST has a long track record in the aerospace components industry. Through its operating subsidiary O & S Research, OPST has been manufacturing precision optical components for the aerospace industry since 1950. In 1992, it was selected to supply the anti-glare optical filters for the Boeing 777 cockpit displays. In 1998, it was selected to supply the anti-glare optical filters for the space shuttle avionics upgrade program.
OPST has been profitable for the past seven years with gross margins and operating margins consistently above 25% and 10%, respectively.
OPST does not pay a dividend.
Conclusion
OPST is a rarity, as most stocks trading near their net cash levels are usually loss-making. No dividends, shares repurchases or any other intention to return cash to shareholders is disappointing. But the huge margin of safety more than makes up for it.
Disclosure
The author does not have a position in any of the stocks mentioned.
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