Saturday, May 7, 2011

Micro Cap Value Idea: OPT Sciences Corp (OPST)

OPT-Sciences (OPST.PK) manufactures anti-glare and transparent conductive optical coatings which are deposited on glass used primarily to cover instrument panels in aircraft cockpits.

This is another micro cap company that has a tiny enterprise value due to a massive amount of cash and securities on the balance sheet. At a share price of $13, the market capitalization is $10 million, but the enterprise value is only $1.4 million.

At $13, the company trades for ~1x its net current assets ($12.92 per share) and 0.9x its book value ($14.12/share). So, at a minimum, the downside is small: the company could shut down and liquidate with a small or no loss to shareholders at this price.

The company has $10.6 million in retained earnings; approximately 100% of the market capitalization. That is evidence of value creation.

Whopper Investments did a write-up of OPT Sciences that was posted on Seeking Alpha:

in the past five years it has never earned less than $409,000 in operating income, and has twice earned more than $1 million (the highest op earnings were just under $1.3 million). So, on an EV/EBIT, you are paying somewhere between 2.5x cyclically depressed EBIT to somewhere less than 1x, depending on what you think the sustainable earning amount is
Right. It is hard to know for sure what the sustainable earnings / cash flow are (i.e. over an entire economic cycle), but it is clear that you are buying the business very cheaply and with a great margin of safety due to the net current asset and tangible book value coverage.

The company discloses:
"Sales for recent quarters have been positively affected by the substantial inventory accumulation of one of our largest customers in anticipation of a transition of principal manufacturing operations from Japan to Taiwan. The inventory accumulation is now completed. During the balance of the year, we expect sales to that customer to be substantially curtailed..."
As the Whopper article mentions,
The biggest risk is economic, as the economy’s downturn has caused several delays in orders and the weak economy could continue to impact the company. Other large risks include concentration risk (two customers represent 60%+ of sales) and especially risks from the new Boeing Dreamliner.
However, the company has reported an improvement in backlog,
"During the first quarter of 2011, the Company booked $1,369,000 in new orders compared to $1,882,000 in new orders booked for the fourth quarter of 2010 and $1,307,000 in new orders booked in the first quarter of 2010. Our backlog of unshipped orders was approximately $1,956,000 at the end of first quarter, down approximately $456,000 from the end of the fourth quarter of 2010 and up approximately $402,000 from the first quarter of 2010."
That is a year over year improvement in new orders booked, and in size of backlog.

The best bid in the order book at the close on Friday was $11.57. At any price under $12.92, you are getting paid to take part of a profitable (albeit small and illiquid) business.

Disclosure: I am currently long shares of OPST.

1 comment:

Taylor Conant said...


I just spoke to Lorraine, their comptroller. She was not very happy to speak to me and was suspicious. She told me that "technically we're a publicly traded company but in reality most of the shares are held by one individual [in his trust] for his children." I asked her my first question about why customers would work with OPST over their larger competitors and she claimed ignorance on it. Total ignorance. Like, "Well, we have long-standing relationships, so I guess that'd be it." Couldn't tell me anything about the products or services they offer.

I left my name and number to let someone more informed follow up with me but she made it clear that they don't really have any interest in anyone buying and selling their stock. I didn't get to ask any other questions.

Good luck with it, hopefully you can make some money!