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A Solid Little Business: Mocon Inc (MOCO)

February 17, 2010 | About:


If you’re looking for a flashy company that will triple by year’s end, this is not the company for you. However, if the idea of a small, well run company with a solid track record and hefty yield sounds appealing – keep reading. Mocon has been flying under the radar for many years quietly going about its business. You won’t find many press releases outside of SEC filings. Please note – this is a micro cap name with limited float – so institutional ownership is at a minimum. It also means that the stock is thinly traded so liquidity is an issue.

The company was founded in 1966 specializing in test and measurement instruments for the food packaging industry. Despite its small size, their revenue stream has become fairly diverse. Mocon currently holds over 70 domestic and international patents to protect that revenue.

The company has a very consistent track record of profitability and continues to chug along. I’ll be watching to see if there is any potential for top-line growth as it has stalled in recent years. What I find very attractive is the fact that Mocon has been able to maintain hefty free cash flow which is more than adequate to sustain its above average dividend (currently 3.7%).

The balance sheet is also a major strength – it has over $2 in cash and no debt. This is a very non-capital intensive business with only 5.8% of the capital structure in PPE, therefore maintenance cap ex is at a minimum. It is certainly possible that the balance sheet is over capitalized. The company has made acquisitions in the past, but management has been prudent with cash. The company recently announced that it had completed its acquisition of a minority equity interest in Luxcel Biosciences Limited (Luxcel), Cork, Ireland, effective January 15, 2010. The management team is also a plus – insiders own over 15% of the stock.

Description:

MOCON, Inc. (MOCON) is engaged in designing, manufacturing, marketing and servicing products and providing consulting services primarily in the measurement and analytical instrument and services markets. The Company’s products include instruments that detect, measure and monitor gases and chemical compounds. Its gas and vapor permeation products were used in the food packaging industry to measure small amounts of moisture which adversely affects dry cereal and other food packaging. Its primary business, the detection, measurement and analysis of vapors and gases, serves industries far beyond food packaging. Its products serve niche markets from foods, beverages, pharmaceuticals and consumer products, to oil and gas exploration, industrial safety and homeland security.







Book Value/ Share


Debt/ Equity


Return on Equity (%)


Return on Assets (%)


Interest Coverage


12/08


$5.05


0.00


14.4


12.3


NA


12/07


$4.59


0.00


15.0


12.8


NA


12/06


$4.02


0.00


17.7


14.5


NA


12/05


$3.48


0.00


16.1


12.8


NA


12/04


$3.22


0.00


15.3


11.7


NA


12/03


$3.09


0.00


13.3


11.1


NA


12/02


$2.99


0.00


14.0


11.6


NA


12/01


$2.82


0.00


22.1


18.0


NA


12/00


$2.69


0.00


20.9


17.7


NA




Positives:



  • Solid history of consistent profitability.
  • Generates sustainable returns on capital.
  • Dominates a small but niche market.
  • Responsible capital allocation by management.
Valuation:



  • EBIT yield 10%.
  • Discounting almost zero growth.
Risks:



  • Future organic growth.
  • Highly competitive industry.
  • Thinly traded stock.






Disclosure: Author currently owns no shares

About the author:

William J. DeRosa, Jr., CFA
William J. DeRosa, Jr. is the General Partner of Anthem Asset Management, LLC is an independent investment management company. He has also served as Director of Equity Research and Senior Portfolio Manager at various buy-side asset management firms. Mr. DeRosa is a Chartered Financial Analyst and is a member of The CFA Institute.

Rating: 4.6/5 (10 votes)

Comments

sapcap
Sapcap - 4 years ago
What a gem of a company. This is exactly the kind of business I would like to own; however the stock appears to be fully valued based on its historical growth. I will keep an eye on this one
batbeer2
Batbeer2 premium member - 4 years ago
You and I both.

Please leave your comment:


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