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Scientific Industries: Net Cash Represents Close to Half of Market Capitalization

December 07, 2012 | About:
This is one in a series of articles where I will be covering most of the "30 Obscure, Profitable Stocks" listed by Geoff Gannon on his blog on Nov. 29, 2012. Many thanks to Geoff Gannon for the wonderful list of interesting stock ideas.

Scientific Industries Inc. (SCND) is engaged in the design, manufacture, and marketing of standard benchtop laboratory equipment, customized catalyst research instruments, under its wholly-owned subsidiary, Altamira Instruments Inc., and since November 2011 through its then organized subsidiary, Scientific Bioprocessing Inc., the design of bioprocessing systems and products. Its products are used primarily for research purposes by universities, pharmaceutical companies, national laboratories, medical device manufacturers, petrochemical companies and other industries performing laboratory-scale research.

Valuation

SCND is currently trading at a trailing twelve months EV/EBITDA of 29.24. In terms of asset-based valuations, it is currently valued at 0.80x P/NTA. SCND achieved a five-year average ROE of 7.4% and a five-year book value per share CAGR of 5.1%.

SCND reported a net loss of $62,200 on net sales of $1,351,700, for the first quarter of fiscal year 2013, 2, as compared with net income of $59,400 on net sales of $1,541,000 for the first three months ended Sep. 30, 2011. The loss was principally due to the $75,700 increase in the loss by the Catalyst Research Instrument Operations which experienced a $181,600 decline in net sales and the $75,000 loss incurred by the newly commenced Bioprocessing Systems Operations.

Financial And Business Risks

SCND is in a strong financial position with net cash of $1.3 million representing 46% of its current market capitalization of $2.8 million.

In fiscal year 2012, no single customer represented over 10% of SCND's total sales. However, SCND has a limited number of Benchtop Laboratory Equipment products with one product, the Vortex-Genie(R) 2 Mixer, SCND's principal product, representing 42% and 63% of its total net sales in 2012 and the Benchtop Laboratory Equipment segment's 2012 sales respectively.

SCND's Catalyst Research Instrument Operations segment and the newly commenced Bioprocessing Systems Operations segment recorded losses in the first quarter of fiscal year 2013. SCND's Catalyst Research Instruments line of products consists of only a few products, with future success hinging on SCND's ability to make engineering improvements to existing products and develop and add new products incorporating more current technology. The success of SCND's new Bioprocessing Systems operation will be heavily dependent on its ability to develop and market new products. SCND does not have prior experience with products of such a complex nature. SCND attributed the losses for the Catalyst Research Instrument Operations segment to the fact that sales of catalyst research instruments are sold pursuant to a small number of larger orders typically averaging over $100,000 each, resulting in significant swings in revenues. Also, SCND expects the Bioprocessing Systems operation segment to generate future sales from products currently under development.

SCND purchases all its components from outside suppliers and relies on a few single suppliers for certain of its Benchtop Laboratory Equipment components, including the Vortex-Genie 2, mostly due to cost considerations. Many of its suppliers produce the components in overseas factories, and orders are subject to long lead times. SCND keeps excess quantities of critical components that cannot easily be procured to minimize the risk of supply shortages. This is reflected in a significant amount of capital tied up in working capital, with inventory days exceeding five months.

According to SCND, it takes two to three years for a new benchtop laboratory equipment product to begin generating meaningful sales, due to the reliance on sales through the catalog distribution system. SCND's Benchtop Laboratory Equipment products are generally distributed and marketed through an established network of domestic and overseas laboratory equipment distributors, who sell SCND's products through printed catalogs, websites and sales force.

Business Quality and Capital Allocation

Founded in 1954, SCND has focused on providing reliable products, which most notably includes the design and manufacture of the world-famous Vortex-Genie laboratory vortex mixer and shaker, as well as a complete line of other Genie lab products including microplate shakers and mixers, cell disruptor and homogenizers, magnetic stirrers for every need. Over the years, this vortex mixer and shaker has become an essential piece of equipment for any type of laboratory, and its vast array of accessories permits convenient mixing in any type of container. The Vortex-Genie product line has evolved and expanded over the years, but has maintained its reputation as a “workhorse” and a “must have” in almost any type of laboratory.

SCND is profitable for the past decade and has paid dividends in every single year since 2007, and currently sports a dividend yield of 1.4%.

Conclusion

Despite uncertainty over the Catalyst Research Instrument Operations segment and the newly commenced Bioprocessing Systems Operations segment, SCND's valuation is backed by net cash of $1.3 million representing 46% of its current market capitalization and its crown jewel - the Vortex-Genie laboratory vortex mixer.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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