OPST - Opt Sciences

[60°North Investments]

This is a nanocap company that manufactures "anti-glare and/or transparent conductive optical coatings on glass used primarily to cover instrument panels in aircraft cockpits". They've been doing precision optical instruments since 1950. The company website is absolutely horrible, probably hasn't changed at all in the past million years. Still, this is a niche business that has grown sales 6.6% CAGR the past 6 years (assumes FY15 sales will be $7.2m per their guidance from Q3), at the same time growing EBIT and net income by about 17% CAGR. Even though they've been around for over 60 years, the annual sales are still below $10m.

As can be seen from the CAGR figures, margins have expanded as sales have grown. Net margin has gone from 9.4% in 2010 to 20% for the 9 months of FY2016. Basically all of this has been because of gross margins going from 29.6% to 41.8% (not sure they'll stay at that level as part of it was due to product mix). ROICs have also been great, jumping from 14% to close to 25%. Total capex spend for the past 5 years has totalled $0.67m while depreciation totalled $1.57m, probably can't go on forever like that.

All this is great, but then comes the balance sheet. At the end of this year there'll be about $3.1m of net working capital (I'm guessing $1m of cash is needed in operations). Then there's about $2m excess cash, $9.5m (!) marketable securities, $1m in net PP&E and less than $1m in current liabilities. No debt. The marketable securities were as of last FYs end about 2% common stocks, 30% preferred stocks, 19% corporate notes, 23% HY bonds, 9% foreign debt securities and 4% mutual funds.

Arthur Kania (I think 83yrs old) owns 66%, and there's Kania Jr. also in the company. About 60% of sales are from 2 customers, so there's the customer concentration risk.

I haven't yet figured out what kind of risks there are that these guys would lost the business to some competitor. Even if I get comfortable with the business not being threatened, I'm not sure how is this going to get valued any differently than it is today. Market cap is $15m, EV is $3.8m if you assume they need $1m cash for operations. Obviously, if they stopped using the company as a family investment account, it'd be multiples worth of what it is today. I would think a business with +20% ROIC, very asset light, doesn't require huge working capital or capex, grows steadily, would get a multiple of close to 10x EBIT even though it's a small business.

I don't know if this is currently investable, but would be interesting to hear what could possibly happen here in the future that would unlock the value?

[oddballstocks]

Here's a blast from the past.  Rode this one from right below $12 to $15 or so, looks like it's up a few bucks since then.

The problem is the ownership structure.  The Father-in-law owns the company and his son-in-law is running it.  At one point they had some material out explaining the trust relationship.  I don't see how these guys give up control.  They are keeping the cash as a tax efficient way of saving for the future.

Investors won't get the cash out, and you need to be content with whatever the company does.  There's no way to shake it up, and my sense was management is doing what they want.  It's a decent business, very concentrated.

The outcome here is that someday, and maybe a very long someday, these guys get tired and sell.  The counter-point to that is there is a family trust formed for the descendants of the founder to own this thing.  When you found a trust to give to kids, grandkids etc do you think a sale is in the cards?

Here is my writeup from 2011: http://www.oddballstocks.com/2011/12/two-very-different-un-researched.html

[60°North Investments]

That's probably how this will go, excess cash gets ploughed into more marketable securities and the business grows slowly by time. In general these are interesting cases from valuation standpoint. If there's major likelihood that the company won't pay any dividends or buyback shares (i.e. shareholders likely won't see cash coming back), do you just ignore the cash that's sitting in the investments, or how do you go about it. It seems like in this case that's roughly what the market is doing, valuing it as if the $9.5m of marketable securities and few million of cash didn't exist.

[writser]

FWIW they took a little hit a few days ago as they are planning to go dark (link). I believe there was also a recent VIC writeup on this idea.

[oddballstocks]

That's probably how this will go, excess cash gets ploughed into more marketable securities and the business grows slowly by time. In general these are interesting cases from valuation standpoint. If there's major likelihood that the company won't pay any dividends or buyback shares (i.e. shareholders likely won't see cash coming back), do you just ignore the cash that's sitting in the investments, or how do you go about it. It seems like in this case that's roughly what the market is doing, valuing it as if the $9.5m of marketable securities and few million of cash didn't exist.

The company paid a big special dividend when there was the fear of the dividend cliff.  If I remember it was $1.25 or $1.50 per share, about a 10% yield.

There are a number of companies just like OPST, MPAD, SODI etc.  I'd say MPAD is in a worse spot in that their majority owner is a German who lives in Germany and doesn't seem involved in the business at all.  MPAD is a nice business, it's a shame they can't detach from the majority owner.

[oddballstocks]

FWIW they took a little hit a few days ago as they are planning to go dark (link). I believe there was also a recent VIC writeup on this idea.

Now things are interesting.  This is the worst time to buy, right before they go dark.  Wait a year or two when shares have continuously fallen to $10 and buy.

The share price will most likely decline from here while the company grows.  Eventually the gap will become huge, but until then this is probably dead money.  I'd love to be proven wrong.

[writser]

FWIW they took a little hit a few days ago as they are planning to go dark (link). I believe there was also a recent VIC writeup on this idea.

Now things are interesting.  This is the worst time to buy, right before they go dark.  Wait a year or two when shares have continuously fallen to $10 and buy.

The share price will most likely decline from here while the company grows.  Eventually the gap will become huge, but until then this is probably dead money.  I'd love to be proven wrong.

I wouldn't pay too much attention to the timing aspect myself. If you think it is good value you buy - if not you don't. As far as I know there are no institutional investors and/or index funds in these small caps who have to get rid of their holdings. It could trade down a little but I wouldn't bet any money on it. A counterexample would be UPGI (Universal Power Group). Stock plummeted to a decade low when they announced they were going dark in late 2013. Shares traded up to their original level only a few months later. Granted, I never did extensive research on this name so maybe I overlooked something.

[NeverLoseMoney]

FWIW they took a little hit a few days ago as they are planning to go dark (link). I believe there was also a recent VIC writeup on this idea.

Now things are interesting.  This is the worst time to buy, right before they go dark.  Wait a year or two when shares have continuously fallen to $10 and buy.

The share price will most likely decline from here while the company grows.  Eventually the gap will become huge, but until then this is probably dead money.  I'd love to be proven wrong.

I wouldn't pay too much attention to the timing aspect myself. If you think it is good value you buy - if not you don't. As far as I know there are no institutional investors and/or index funds in these small caps who have to get rid of their holdings. It could trade down a little but I wouldn't bet any money on it. A counterexample would be UPGI (Universal Power Group). Stock plummeted to a decade low when they announced they were going dark in late 2013. Shares traded up to their original level only a few months later. Granted, I never did extensive research on this name so maybe I overlooked something.

I agree with Nate on this one. I wouldn't touch it for quite a while now that they'll go dark. Often companies will still post an annual report on their website or mail them to shareholders, but there's also a chance they will go completely dark and will not provide any information. Nate's site and newsletter contain some examples.

In that case there will be many shareholders who give up (or die) eventually and the shares will become a lot cheaper. Their website looks ancient and I wouldn't want to bet on them keeping shareholders informed there. Also, I don't see any explanation (8-K or press release) by the company with the reason for going dark. They just filed the form when the number of shareholders of record fell below 300 and they had the chance to go dark. That doesn't give me confidence that they will communicate with shareholders in the future.

[watsa_is_a_randian_hero]

The outcome here is that someday, and maybe a very long someday, these guys get tired and sell.  The counter-point to that is there is a family trust formed for the descendants of the founder to own this thing.  When you found a trust to give to kids, grandkids etc do you think a sale is in the cards?

depending on the ownership structure, they may get a basis stepup when the older generation dies.  This could be a catalyst. 

[oddballstocks]

Put together some thoughts: http://www.oddballstocks.com/2015/11/opt-sciences-going-dark-excuse-to.html

I'm negative on this and the company.  I might be mis-remembering, but I think they were one of a handful of companies that sends their annual meeting announcement after the meeting has taken place, or a day before.  Whatever it was I remember thinking it was distasteful in the timing.