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Opt-Sciences $OPST- Follow Up

February 01, 2012 | About:

A year ago, when I was first beginning my serious foray into the micro-cap universe, I mentioned OPST, a consistently profitable micro-cap trading near net cash levels. Given that it’s been a year, the company’s still cheap, and I feel like I’m a better investor now than I was then, I thought it was time to revisit the company.

In many ways, OPST is similar to the last stock I discussed, MPAD. They’re both simple businesses (see my discussion of complex vs. simple investing) that earn relatively high returns on capital and have huge excess cash balances and tangible assets that provide nice downside protection.

As a quick reminder, OPST develops anti-glare coating for aircraft instruments. This is a pretty cyclical business, and orders fell pretty far during the great recession. However, OPST managed to stay profitable throughout the recession and is experiencing a nice cyclical rebound now.

I’m going to tackle this stock a bit differently and first mention my concerns with the company, and then move on to all the pieces that attract me to it.

The one big area for concern is that there’s no mention of the Dreamliner in the OPST’s latest annual report or their previous one (you can see all the planes they work w/ on p. 5), but their 2009 annual report does mention that their products were not included in the then-current design of the Dreamliner. If OPST can’t break into the Dreamliner market, it could mean their future earnings and revenue will come in below their historical rates. (In a very related risk, almost all of OPST’s sales come from two aircraft equipment suppliers)

Two other quick areas for concerns- first, p.9 of their annual report mentions they are considering making new investments in equipment and processes to continue competing successfully. Given that p.5 of their annual report says they expect 2012 sales similar to 2011, and the possibility of future declines in sales due to Dreamliner exclusion, an increase in capex is a bit worrisome.

Finally, the company used to keep all of their excess cash simply in cash. However, in the past year, they shifted and put their cash into a managed portfolio, consisting mainly of corporate debt. I’d personally rather the business just paid out the cash or bought back shares, but many of these basically family run companies (insiders own ~70%… sorry, no activists here!) choose to invest in managed portfolios (Gencor is another example) to avoid the dividend taxation that would come with paying out a dividend and doing so at the personal level, so I can’t really fault them for this.

Ok, so enough discussions of the negatives. Honestly, they’re quite small compared to the asset protection and upside potential OPST offers at today’s prices.

Let’s start w/ assets. The company has no debt. Net cash + investments come in at just over $12 per share (basically, today’s stock price), NCAV comes in at just under $13.75 per share, and TBV comes in at just over $14.80 per share.

However, OPST’s core business likely isn’t worth “just” tangible BV. ROIC has consistently come in over 25%+ over the past ten years, and the company hasn’t reported a single operating loss over the same time frame (though, admittedly, op. inc was much smaller at the start of the decade). Average EBIT for the last five years has come in at ~$900k, and this includes basically the two worst years for aircraft manufacturing (2008 and 2009), as well as a Boeing strike. Applying a simple 8x EBIT multiple to this number would give us an operating value of $7.2m, or ~$9.25 per share, which when added to their net cash per share would give a target price of ~$21.30.

TTM operating income comes in at $1.06m, and, given the company is predicting similar sales levels in 2012, will likely come in somewhere similar this year . If we applied an 8x multiple to that number, we’d get an operating value per share just over $10.93. Adding back the net cash, our target price would be just under $24 per share.

Overall, I very much like OPST for it’s simple business, high cash levels and downside protection, and nice upside potential. I have added a position as part of my net-net basket and would likely add further on any dips.

Disclosure: Long OPST, GENC, and MPAD.

Rating: 3.9/5 (9 votes)


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