disappointment on SCND

SCND came in with a disappointing .04. The bad news is I am stuck until the annual as is anyone who bought on my comments. The good news is the earnings play I expected is still in tact but delayed.

Heres what happened and where the numbers missed from the 10Q

"Income before income taxes increased by $4,800 (7%) from $64,800 to $69,600, for the three month comparative periods ended March 31, 2008 and March 31, 2007. The small increase reflected (i) lower profits for the benchtop laboratory operations due to increased raw materials and research and development costs, and (ii) the loss incurred by the catalyst research instruments operations due to an inability to complete orders because of vendor-caused delays in delivery of a large order"

Sounds like they will fill alot of that next Q based on this "As of March 31, 2008, there was an order backlog of $1,275,000 for catalyst research instruments, of which approximately $1,035,000 is scheduled to be fulfilled in the fourth quarter. "

Inventories have also moved up significantly from 1.4 to 1.8 million presumably to support those sales. Next quarter should be quite good based on that. Revs probably in the 2 million ballpark with better margins. I think I am still going to get my solid gain but I'll have to wait 4 months which was not what I wanted.

Off the top of my head assuming they don't have some excuse about orders being delayed due to meteor showers, or a stampede of unicorns I am figuring something like

Revs 2,000,000

Gross 790,000

SGA 400,000

R&D 100,000

Pre-tax 290,000

Net 180,000

EPS .15

That should be safe anyway. Might be worth remembering for 3 months hence. I think those numbers will prove conservative as well. At the same time they did not add many new orders in the catalyst division so the backlog numbers in the annual should be scrutinized carefully to determine if those numbers are sustainable.

SCND new pick

Its been awhile since I added to this blog but I finally have something new to say. Actually I probably had all kinds of comments on various things I have bought in the past but I was probably just to busy or lazy to update them.

Today I am outlining a new pick that is simply an earnings play on what I expect to be a blockbuster report in the next 10 days or so. The company is thinly traded so this is not a large position for me.

SCND operates in 2 segments. The first segment provides benchtop equipment for the lab. They sell mixers as their primary product but also sell a variety of other equipment including incubators shakers etc. The other division sells catalyst research instruments. Again the target markets are government labs petrochemical companies and all the usual players you would expect.

So here is the thesis.

The company earned .08 last quarter against their 3.95 share price. Based on historical trends their record revenues of 1.8 million should have generated much better EPS but they spent additional money on R&D, incurred training costs, and were squeezed on margins in their benchtop equipment segment.

I think they are going to get 2 big benefits this quarter that could lead to EPS as high as .20/share. I am not sure if they will get that high but at the very least EPS should be substantially improved.

There are 2 reasons for this.

Reason 1 better sales:
Backlog in the catalyst instrument segment has been booming along with revenues. Backlog was
up to 1.6 million in this segment at the end of last quarter up 150% from the previous quarter. If
you look at the revenue trends for this business the last couple quarters they are quite good.

Backlog Sales next Q
590,000 552,000
631,000 856,000

This would imply revenues in the 1.6 million range this quarter for this division alone. I do not expect the numbers will be quite that good but they should be considerably better than sales last quarter. This is further supported by customer advances which surged from to 1.249 million this quarter from just 265k last quarter up almost 500%. FWIW I am swagging they may do as much as 1.4 million in the catalyst division which would put total sales close to 2.4 million all else equal up 33% sequentially to another quarterly record.

Reason 2 better margins:
I spoke with the CEO this week to try to get a handle on the companies margins. They mentioned margin pressure in their 10Q in the benchtop division as being a factor. Indeed it appears to me margins in that division are now in the 38% range vs roughly 50% previously. Per the CEO margin pressure has been coming from higher zinc prices. This is very good news IMO as I think those pressures are about to get erased.

If you examine the companies inventory they turn their inventory about 3-4 times a year. That means the cost of zinc in their products today is probably what they paid 3 months ago. A short review of zinc prices shown they were extremely high between June and August of last year when they would have been buying inventory for Q2. Since then prices have dropped from an average of what looks like about 1.40/lb to prices under 1.20 a pound at the end of the year. They are even less today at around 1.00 a pound. Considering margins in that division were likely 10-12% higher when zinc prices were at 1.00 I think you could see a .03 sequential improvement from zinc prices alone over last quarter and more next quarter.

Finally I would add that they do a considerable amount of business overseas comprising about 40% of sales. For those searching for refuge in exporters this may be it.

The company also has paid a dividend in the past and has a book value of around 3.00 a share with about 1.00 a share in cash so the downside seems quite limited at the current price of 4.00

There is the narrative. I am hoping for a score very much like one of my better ones from last year in VII which at the time was an undiscovered book value/earnings play. There is at least a reasonable chance of a 50%-100% gain IMO and I expect the downside to be limited given the book value.

Ah if only it had some liquidity I would be loaded to the gills.

IVX.V / IVXLF another new purchase

Company is Inventronics. They make enclosures for telecom equipment. As with most of my posts lately this one will be short due to time constraints but the short story is this company earned .08 last quarter and .11 for the year. The annual number would have been better except for a blip in exchange rates that ruined Q3. That has now been corrected.

Company is bullish about future prospects and the balance sheet looks pretty decent. I think it looks like a pretty good buy around its current price of just under a buck a share. More later if time allows.

BDR another purchase

I have little time to go into details here but BDR posted EPS of .09 for the second consecutive quarter with the most recent being a seasonally weak quarter. The stock is currently trading at 1.75 with tangible book value of over 3.00 a share.

Sure looks cheap and I think it may get some additional positive movement with an earnings PR tomorrow.

JCTCF new purchase

I mentioned previously that this one was on my watchlist as a buy for later in the year. After seeing stellar second quarter results I decided to take the plunge and go ahead and buy now. For the quarter ending in February the company posted EPS of .21/share a 50% increase over last year. Keep in mind that this is a company that sells wood products for boat builders, landscaping timbers etc.

In theory there are few companies that should get hammered more but they are not only beating last years numbers they are destroying them. To provide some balance revenues were actually down a bit over last year from 16.4 to 15.1 million but they increased their gross profits by almost 10% and cut SGA expenses.

The companies seasonally stronger quarters are coming up due to their metal products division where they manufacture a product called adjust-a-gate as well as a dog kennel under the name lucky dog. In a press release from last year they indicated they expected to more than double the number of locations carrying their adjust-a-gate product from 724 to 1740. That may explain the bullish comments in their recent earnings PR.

Here is the quote

"We continue to believe that the current fiscal year can be a record year in terms of earnings. Results in the third and fourth quarters should be significantly better than the first two quarters of the current fiscal year based on very positive order trends for our specialty metal products coupled with a normal seasonal pickup in activity in our lawn, garden and pet segment"

The previous record earning numbers were 1.04. They earned .37 through the first 6 months of the year. That means its likely they earn at least .67 over the next 2 quarters which should make for some dandy comparisons. In addition the stock is trading at a slight premium to book value with a current ratio of 5. In addition they have roughly 150,000 square feet of warehouse/office space that is likely worth considerably more than their book value.

I am very impressed with their ability to weather the perfect economic storm for their business and simply can't resist a company trading around book value that is ready to turn in a couple of whopper quarters and is trading at a PE of just over 7.

KPPC a cash cow

I put a bit of money into Kapstone Paper today. Kapstone is a manufacturer of kraft paper, linerboard and dunnage bags in the US. I find the company to be an excellent cash flow and balance sheet play with strong earnings numbers and at a reasonable even cheap valuation.

Kapstone just announced their 4th quarter numbers earning .23/share up 46% over last year. For the year they earned a solid .75/share against a 6.55 share price at the close today giving them a PE of a modest 8.5. Its EV/EBITDA is under 3. Not only is it reasonably priced from an earnings perspective but the company generated enormous free cash flow over the last year of roughly 1.10/share which means its trading at about 6 times free cash flow.

The balance sheet is excellent with their cash and receivables of 86 million exceeding all balance sheet liabilities. Book value is roughly 4.00 per diluted share.

Prospects:
There are reasons for optimism for the companies prospects going forward. First there was a major capacity contraction in the Kraft paper business in recent years. This has pushed up the price of kraft paper and in fact is still pushing up prices. The company recently announced another price increase of $40 a ton which will partially benefit Q1 results and will fully benefit Q2 results. There is expected to be an increase in linerboard prices also. Increases in prices of course flow straight to the companies bottom line.

Recent consolidation in the industry should help also. International Paper recently purchased Weyerhaeuser's containerboard business which is expected to have a positive impact on the industry due to an expected reduction of capacity according to Claudia Hueston at JP Morgan. The company stated on their conference call that they expect for this to be a positive for the industry as well.

Finally I will engage in a bit of pure speculation here on another positive for the market for Kapstone's products. Kraft paper which is a large share of their business finds its heaviest use in paper grocery bags. This business was shattered over the last 20 years as paper was largely replaced by plastic. I suspect that trend may reverse. There is a strong environmental movement to restrict or ban the use of thin plastic grocery bags. The bags were banned in San Francisco last year and in January China banned them as well. Ireland in effect taxed them into oblivion back in 2002. The economics here seem interesting as a plastic bag costs about 2 cents. A paper bag costs about 5 cents and various plastic substitute bags are in the range of fifteen cents. I expect this environmental movement to pick up steam and I expect the net result to be that grocers will be using more paper bags at checkout. Indeed that has what has happened in San Francisco. The economics of the grocery industry with their razor thin margins just don't allow ultra-expensive alternatives.

Insider buys:
If that isn't a reason for optimism than insider activity may be. Insiders over the past 6 months have made net purchases of almost 250,000 shares at prices up to 7.26 well above current price levels.

The negatives:
There is not much growth baked into the cake here that does not involve price increases. The company has stated they are interested in acquisitions and they certainly have the balance sheet to pull them off but growth should be rather modest based on their existing business.

The company is also sensitive to changes in the costs of its inputs. Energy costs, transportation, wood chips, chemicals etc all have an effect on margins. The company has stated that the prices on wood chips remains stable however they have obviously seen an increase in energy costs, and chemical costs have also increased. Their pricing power should more than compensate for these factors but it is important to keep them in mind.

APL.V new position

Bought a token position friday in this canadian provider and servicer of centrifuges and other equip. Purchase price was .24/share.

This looks like a short term earnings play with a solid balance sheet that should put the floor under the price. At .24 the stock is trading at around book value but the company also earned .016 last quarter.

They have seen a substantial increase in product orders in fiscal 07. Of their 2.5 million in orders they have delivered 1.2 million. If I am reading this correctly they are implying they expect to fill an additional 1.3 million in Q4. That would roughly double their product sales and could generate EPS of .03 a share.

Here is the relevant quote from their last earnings release

"Firm machine sales for fiscal 2007 now exceed $2.5 million, of which only $1.2 million have been recorded to September 30, 2007. Combined with expected increases in parts revenues, Appulse management looks forward to a further increase in revenues and earnings in the final quarter of 2007."

I have to think it will look undervalued to someone when the next report comes out. It is thinly traded but with a good balance sheet underlying the stock and a whopper of a quarter coming up I think it was worth a small position.