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Electro-Sensors: 4% Yield with Net Cash Representing 70% of Market Capitalization

December 12, 2012 | About:
Incorporated in Minnesota in July 1968, Electro-Sensors Inc. (ELSE) is engaged in the manufacture and distribution of industrial production monitoring and process control systems. ELSE periodically makes strategic investments in other businesses and companies, to facilitate development of technology complementary to its existing products, through its subsidiary, ESI Investment Company. ESI Investment's primary investment is 343,267 shares of Nasdaq-listed Rudolph Technologies Inc. (RTEC) which is accounted for using the available-for-sale method. RTEC is a leader in the design, development, manufacture and support of defect inspection, process control metrology, and data analysis systems and software used by semiconductor device manufacturers worldwide.

Valuation

ELSE currently trades at a trailing twelve months P/E of 20.39 and a trailing 12 months EV/EBITDA of 4.41. In terms of asset-based valuations, ELSE is currently valued at 1.20x P/B; its previous historical peaks and troughs were 1.82x and 0.84x P/B in 2007 and 2009, respectively. ELSE achieved a 6.2% ROE for the past 12 months and a five-year average ROE of 6.4%.

Financial and Business Risks

ELSE is debt-free with net cash and short-term investments of $9.3 million representing 73% of its current market capitalization of $12.8 million.

ELSE's major competitors such as Danaher Controls, Red Lion Controls, Control Concepts, 4B Elevator Components Ltd., Durant Corporation and Contrex, Incare are much larger with more established names. In addition, they have larger sales forces and provide customers with a wider variety of sensing instruments.

ELSE claims that it is not dependent on any single supplier for materials and has not experienced any problem of short supply or delays from its suppliers historically.

No single customer or group of customers accounted for more than 10% of ELSE's 2011 sales.

Business Quality and Capital Allocation

ELSE believes that its competitive advantages include the fact that its products are sold as ready-to-install units and that its products have a wide range of applications. ELSE's customers have diverse applications for its products in the grain, feed, bio-fuels, power generation, water utilities and waste water treatment, mining, chemical and other processing areas.

ELSE manufactures and sells several different types of monitoring systems that measure actual machine production and operation rates, as well as systems that regulate the speed of related machines in production processes. Manufacturing companies purchase ELSE's products to achieve significant savings in both time and materials by adding production monitoring and drive control technology to existing manufacturing processes to coordinate operation of related machines.

ELSE has been profitable for the past eight years and has paid dividends in every single year since 1995 and currently sports a dividend yield of 4.3%. Dividends are paid quarterly.



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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