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.