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Mocon Inc: Safe Profits, Safe Cash Flows and Safe Food

January 02, 2013 | About:
Founded in 1966 and listed in 1979, Mocon Inc. (MOCO) is an international manufacturing company headquartered in Minneapolis, Minn., with operations in Texas, Colorado, Germany and China. MOCO designs, manufactures, markets and services products, and provides consulting services, primarily in the test and measurement, analytical instrument and services markets. Its products include instruments that detect, measure and monitor gases and other chemical compounds which help customers improve the quality of their products, as well as develop new products. MOCO operates in three major business segments: Permeation Products and Services, Gas Analyzer Instruments, Sensors and Detectors and Package Testing Products and Services which were responsible for 59%, 18% and 16% of MOCO's 2011 sales, respectively.

On March 9, 2012, MOCO entered into an agreement to acquire PBI-Dansensor, a manufacturer of specialized instrumentation for Modified Atmosphere Packaging of foods, beverages, pharmaceuticals and other perishable items for approximately $20 million. The acquisition will allow MOCO to push its new products to major markets through PBI-Dansensor's existing international distribution channel markets.

Guru and Insider Alerts

Mario Gabelli first initiated a position in MOCO in the third quarter of 2011 and currently owns 26,190 shares in MOCO at an average cost of approximately $16 per share. Cannell Capital, long/short investment firm, initiated a position in MOCO in the third quarter of 2012, with 139,354 shares.

Robert Demorest, chairman, president and CEO of MOCO sold 10,000 shares at an average price of $14.5 in December 2012.

Valuation

MOCO currently trades at a trailing-12 months P/E of 31.72 and a trailing-12 months EV/EBITDA of 15.77. Its current P/E valuation is close to its new ten-year historical high recorded in February 2012. MOCO achieved a 7.9% ROE for the past 12 months and a five-year average ROE of 15.3%.

MOCO P/E-ROE Comparison 1357108320889.png

MOCO is profitable and free cash flow positive in every single year in the past decade. MOCO has achieved two consecutive years of record sales and earnings along with dividend growth in 2010 and 2011. Management has grown MOCO's revenue and EPS by a respectable ten-year CAGR of 6.8% and 4.8%, respectively. EBITDA margins and net margins have been stable historically, with gross margins showing a gradually increasing trend.

MOCO Earnings-Cash Flow Comparison

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MOCO Profit Margins Analysis1357108637915.png

Financial and Business Risks

MOCO is moderately geared with a gross debt-to-equity ratio of 36% and a net gearing of 9%.

MOCO Cash-Debt-Market Capitalization Comparison1357108976852.png

Given that some of the markets in which MOCO operates in have experienced minimal growth in recent years, MOCO has spent significant resources to develop new products in the food and beverage safety and packaging industries in the past few years, such as the BevAlert system, OpTech-O2 analyzer and the GreenLight food safety test instrument. If these new products do not gain market acceptance as expected, MOCO may not be able to recover the significant research and development and other marketing expenses incurred. The BevAlert Model 8900 is a specialized instrument utilized by specialty gas manufacturers and the food and beverage industry to monitor contaminants in CO2 used in carbonated beverages; while the OpTech O2Analyzer is a multi-purpose oxygen analyzer for beverage, pharmaceutical and food products.

MOCO markets its products and services throughout the United States and in over 60 foreign markets, using a mix of direct sales and independent sales representatives. No single independent representative accounted for more than 10% of MOCO's sales in 2011.

Business Quality and Capital Allocation

MOCO is well-positioned to capitalize on the increased demand in the food and beverage industries for safety testing and monitoring products. MOCON has a long-standing reputation of engineering instrumentation that will help food processors to safely meet shelf-life objectives. MOCO introduced the GreenLight food safety test instrument in August 2010, which determines the presence or absence of bacteria in food products or ingredients. MOCO claims that the GreenLight technology is the first in the industry to provide fast results (approximately more than ten times faster than the traditional agar plate or film methods) for aerobic bacterial counts, allowing packers and processors to deliver safe, perishable food items to the consumer faster with shorter testing cycles.

MOCO's strong organic growth is supported by robust technologies which have allowed for line extensions in several areas. MOCO currently holds 40 active U.S. patents and 34 foreign patents which will expire during the period from 2012 through 2029, and has another 55 patents pending. In addition, MOCO has have begun operating in “Partner Laboratories” in Mumbai, India, and Toronto, Canada, in 2010 and 2011, respectively. These collaborations, with MOCO providing the instrumentation and the partner lab providing facilities and staff, offer MOCO local laboratory services in specific niches.

MOCO has paid dividends in every single year since 1984 and currently sports a dividend yield of 2.9% with a dividend payout ratio of 88%. Dividends are paid quarterly. Management has grown dividends by a ten-year CAGR of 5.2%.

MOCO Dividend Payout-DPS Comparison 1357109271478.png

Conclusion

MOCO’s share price increased by 40% and 24% in 2010 and 2011, respectively. Despite the 8% fall in 2012's share price and strong growth opportunities, MOCO's valuation is too expensive for me. I will wait for a better opportunity to enter into a quality stock like this.

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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