Schmitt Industries (SMIT)

November 20, 2017 Leave a comment

I have been looking at SMIT since the company announced its rights offering in early November. I recently bought a position in the company and think it is extremely cheap. I think the downside is protected by the real estate and upside is quiet large with the equity stake of new management and funds.

SMIT is a company that has 3 core business segments: SBS dynamic balancing (grinding controls), Acuity Laser Measurement, and Xact Tank Monitoring. Until recently, the company used to be run by founder who didn’t really care about the marketing or running the company from a business perspective. In 2016, we had a management change. The new CEO has a business background and has brought a much better approach to running the company.

The company owns 40,000 sq ft building in Oregon. The new CEO tried to sell the part of the building (about 10K sq ft) for around $2.3M in 2016. The sale didn’t happen (we don’t know why) but the company is now looking to rent 7.7k sq ft. Once leased it could bring in around $1M in cash flow. For a company w/ around $6M market cap that is great annual cash flow, plus that would put the entire value of the real estate to be more than market cap.

Out of the 3 business segments the 2 interesting ones are Xact and SBS.

Xact creates satellite based monitors that measures the tank fill level and communicates that information via a 1-way device. The monitors are mostly used for Propane tanks but do work w/ diesel and other tanks. The monitors are easily attached to the tank and can be done by anyone in 15 min. The monitors work in extreme locations/weather. These monitors provide recurring revenue and save the customer money in transportation costs (no need to go fill tank when it is not close to empty). The Xact business does around $2M in annual revenues, very high gross margins, recurring revenue, and growing at 40% rate.

The company is working on a new version of the monitor. This will be a lot smaller and a two-way communication device. Also, most of the competition works on cellular networks and some of the large carriers are phasing out 2G and 3G networks which forces companies to switch devices. So the satellite based product is an easier sell and this creates an opportunity for Xact to get customers from competition.

The other business segment is SBS. SBS is a grinding balancing system that is used mostly in semiconductors. The demand for manufacturing is requiring smaller and smaller chips. This leads to better surface finishes. SMIT offers a product that automates the manufacturing process, where as competition requires human operator. This is a huge advantage and the prior mgmt team didn’t capitalize on.

The SBS segment does around $10-12M in rev and is a nice 50% gross margin business.

So you have Xact business that does around $2M in rev, very high margins, growing at 40%. The SBS business does around $10-12M in rev and around 50% in gross margins. And then you have real estate that is likely worth $6M+. For a company that is trading at around $6M market cap (w/ no debt).

Also you look at insider buys and you see a huge interest from funds (Gabelli, Monongahela, and Teton recent buyers) and the CEO also buying in public market.

Overall this is an extremely cheap company trading at less than liquidation value with some valuable business segments and a management team that is focused on growing and investing (rights offering) in the business.

More reading:
Hidden Asset play

Who monitors the monitors

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Categories: Uncategorized

Performance

October 24, 2017 1 comment

Since I’ve been quite for a while, I haven’t updated the performance. I will do a quick update and will provide a detailed updated once 2017 is done.

Year Performance S&P 500
2009 128.75% 26.46%
2010 8.85% 15.05%
2011 (20.57%) 2.1%
2012 11.7% 16.0%
2013 19.46% 31.90%
2014 46.61% 11.39%
2015 (52.91%) (0.73%)
2016 33.18% 9.53%
Cumulative 142.65% 175.27%
Annualized 11.71% 13.49%

 

Categories: Uncategorized

Update – back from hiatus

October 24, 2017 Leave a comment

I haven’t updated the blog in a very long time. I have still been investing and finding treasures in the market, just didn’t know if I wanted to keep the blog running. But I’m back to writing and will be updating the blog going forward.

I’ve updated my performance page and portfolio. Since the last post (in Sept ’15), lot of changes have happened with my holdings. Here is a quick note on the current holdings:

Bewhere Holdings (BEW): This is a venture start-up but in the public markets. Owen Moore had done a start-up in a similar space and sold the company for a nice profit. He created a start-up in the vehicle tracking space and sold it. Bewhere is his second go in starting a company in a similar space.

Bewhere creates tracking devices that included sensors. The beacons can be used on multiple different scenarios (Brinks is in process of installing it for the trucks, beacons are used on emergency devices to track where the equipment is, beacons were used in an agriculture setting). The initial beacons are bluetooth based as the technology allowed the devices to be cheaper then RFID. The next version is made for LTE (cellular). This is a much bigger market as the telco companies really want cellular beacons that will increase cellular usage and revenue. The cellular devices are currently in process to be approved by the 2 big US telco, approved by Bell Canada, approved in Mexico, and going through testing in Europe. Once the testing is done and the devices are approved, the cellular companies can sell these beacons. The cellular devices will created recurring monthly revenue for the telco and Bewhere.

The company is just starting to show the revenue and mgmt has stated they expect to double revenue sequential quarter-to-quarter for the next 3-5 quarters. This is going to be a fun one to watch as revenue starts showing and investors start noticing the potential.

HemaCare: This is one of my favorite holdings. The company is not followed by any analysts, the mgmt doesn’t put out quarterly financials (semi-annual only), mgmt doesn’t talk with anyone, and company has no need for capital markets. All the while the market for their product is growing rapidly, they are well positioned in the bourgeoning cell therapy market, revenues have been increasing at a high double-digit pace, new facility has 2.5x the current sq footage, and very few shares available.

The company sells human blood products to the pharma industry. They have a long history in this space but in the last 5 years the new management team has sold underperforming assets and grown the services focused on blood products. The company is growing rapidly (40-50% rev growth), has huge advantages on its competition (FDA approval for their collection site and procedures), strong relationships with the growing cell therapy industry (board member who ran the cell therapy division at big Pharma). The company is a hidden gem in a growing industry.

Enservco: This is a special situation in the oil services industry. The company was fortunate to survive the recent oil industry and now get stronger with a new management team. The company was hit hard by the oil down turn in 2014 and a poor decision by old management to increase capacity by acquiring new assets right before the down turn. But with a large fund holder (Cross River) and new management team, the company is poised to come out much stronger. The new management team has already dealt with the debt issue (extending the $30M debt and getting more capacity). The company has also been increasing the offerings and making it less seasonal. Overall we think is a classic deleveraging play but with better upside given the asset acquisition done in 2014. The market is currently sleeping on this one but it won’t be too long before people wake up to the turnaround.

Valeura Energy (VLE): This is a high risk/reward oil drilling play. Although we think the risk is capped by the proven shallow drilling and infrastructure assets the company owns. The upside is from the deep drilling that the company is doing with Statoil. The play is for natural gas in Turkey. The gas prices in Turkey are much better ($6.50+) than in the US. This is a huge find if it is a success, a big enough find that a company the size of Statoil would be interested in. VLE sold 50% of its deep drilling rights to Statoil in return for Statoil taking on the drilling and 3D mapping costs. So far the results look very promising. We should get the results of the first deep drilling test in 60 days.

Undisclosed: This one will remain undisclosed for now. All we can say is it is a resource play. The company has a tiny market cap ($6M) but there is a lot that is happening based on the recent PR activity. Plus we have seen the CEO acquire millions of shares in the public market in the last 4 months, clear indication something big is coming.

 

Categories: Uncategorized

SEV: Presentation and huge growth

September 19, 2015 Leave a comment

Sevcon is one of our holdings that hasn’t been too promotional about what it is doing and its industry. The company has a very small market cap (that will change very quickly). The company is positioned in what is going to be one of the fastest growing markets in the next 3-5 years. Recently the company did a presentation, I think this is one of the first conferences they had talked at in a long while, about the company. Key thoughts:

  • The company has been slowly growing revenues, CAGR of 14% in the last 6 years. But the growth is picking up and the CAGR will be much higher going forward.
  • The business model is based on subcontracting which will lead to rapid earnings growth as sales increases. Most screens and investors will pass on this company if they only look at the financials and skip looking at the business model.
  • Their industry is expected to grow 6x in 7 yrs. This is a key reason SEV is going to be extremely well positioned to grow at much higher rate than 14%.

The key for this company is the sub-contracted business model with a well positioned company in a high growth industry. SEV is not the best company in the industry but a high tide raises all. And meaningful increases in sales will mean faster growth in earnings. Also, you have a large amount of the float owned by Gabelli. So increased investor demand will create an interesting dynamics. As management has stated, the next quarterly earnings will show meaningful revenue growth. That, combined w/ recent investor presentation will bring more eyeballs to this story.

Categories: Updates

Xpel: Q2 and bloodbath

September 1, 2015 Leave a comment

Xpel reported its Q2 numbers on Aug 31st. Although the revenue didn’t meet expectations, the bloodbath in the market has been extremely surprising.

The company reported a solid 35% growth in rev and small net income growth. This headline news sounds bad for the company, when the CEO had said he was expecting to deliver at least 50% growth. So what happened?

The currency headwinds and slow down in ordering from international distributors led to a drop in the top and bottom line. If you listen to the conference call, the CEO mentions that the strength in USD caused distributors to delay their ordering. The distributors decided to use their inventory and hope to buy later, when hopefully exchange rates will work better for them. Many distributors order once a quarter, so a delay in their ordering can have a big impact on revenue. As long as the demand from end users and installers is there, the distributors will need to purchase from Xpel. The CEO mentioned that the growth in PPF is still the same as before. So the demand for PPF is there but Xpel didn’t notice that growth because the distributors decided to destock their inventory. This can last for a short while but they will have to come back and order from Xpel. So the lower revenue growth doesn’t mean business is slowing down. Infact, I believe that the company is growing at much more than the 35% that the accounting numbers show.

Now on the net income side, you have a 35% top line growth but little to no growth in bottom line. So what happened? First, Xpel owns the distributors in Canada and UK. So the currency changes meant that the margins compressed for the company. Now Xpel could have kept its margins by increasing the price it sold to installers. But if you increase prices while competition doesn’t, you could lose business. So Xpel eat the margin compression. Xpel mentioned that this compression in margins resulted in a $300k in bottom line. So net income would have grown 50% if this margin compression hadn’t occurred. Now, I don’t like to make one-time adjustments but the explanation is valid. Xpel already has started to past on price increases to installers. So this means margins will slowly get restored. I think we will have to wait a bit and see how competition reacts. You will see competition increasing prices, meaning they want the old margins, in the near future. I think once you see others passing on the costs, Xpel will be doing similar. So this $300K hit to bottom line will get fixed, but it will take a few quarters.

Finally, the CEO mentioned a few things about the future of the company. First, the window tint business is a very big market. Xpel is going to market their product directly to the PPF installers. The company has been doing testing with select installers and plans to slowly ramp up. This is going to be good boost revenue and additional source of growth. So far the company has been growing 50% just on the PPF market. Now you add the window tint business, so even if there is a slow down in the PPF market (which the CEO is not seeing), you got another much bigger market that they are entering. Secondly, the company is going to open another office in Europe in 2015. So they will have gone from 0 to 2 offices in Europe in about 12 months. Clearly they see huge growth opportunities here. Also, the CEO commented their training classes are still full. So the demand hasn’t slowed down.

The market reacted violently to the shares. The shares are down 33% since it reported Q2 #s. That is after showing a 35% growth in revenue. The market is reacting based on headline news, but the fundamentals of the business are still as good as we had expected. Xpel is my biggest holding and I haven’t sold any shares after this quarter’s numbers. If anything, I’m looking to buy more. I don’t mind the short-term pain for much better results in the long run.

 

Categories: Updates

Ackroo: Q2 and rest of 2015

August 9, 2015 Leave a comment

Ackroo recently announced Q2 numbers. The market reacted violently, sending the shares down 20%. Although if you read the M&A and know the story with this company, then you would be happy with the results and excited for the second half of 2015.

  • The company reported a 10% growth on Y-o-Y. Although this is not something to be proud off, but the subscription revenue grew by 14%. Now this might not look superb either but remember this is achieved with almost no sales team. Also we know this is achieved while the company was focused on integrating the 2 acquisitions. In light of these items, this is really good growth.
  • The management team mentioned that they expect the 2 acquisitions to provide over 200K of revenue in Q3. This is a big deal as it gets the company closer to its 2015 goal. The company can be expected to do over 550K of revenue in Q3.
  • The company is currently around low-600k for breakeven. So we can be close in Q3 and definitely be breakeven or profitable in Q4.
  • The management still expects to do 2M in revenue in 2015. They have done around 650K in the first 2 quarters. That is a run-rate of 700K for the second half. That would be a profitable second half.
  • Management is expecting to do another acquisition in 2015. Clearly management is feeling confident with having the correct operations to acquire and integrate acquisitions. This bodes well for 2016, when they will likely be able to get a line of credit to expand.
  • Everlink, their reseller, is now up and running. Infact they got their first customer from this reseller in Q2. We should slowly start seeing more customers from this reseller. Everlink is a huge account for Ackroo, so management is doing the smart thing of slowly working with them to ensure they have a streamlined process to work with resellers.

It is amazing how quickly this company is moving. The new CEO joined the company only over a year ago. He took the helm when the company had no cash and a bloated cost structure. Since then, he has fixed the operations and took care of the cash issue. Now we are finally starting to see the growth in the revenue side. I think once he is able to get the operations to be profitable then we will finally start seeing the leverage in this business model. For all that this management team has done in the past year, the stock has not moved much. There is a big concern of delivering on the $600K of cash payment in December. With the warrants that will bring it about $2M in cash by January, I think management has enough cash for the big payment and to do another acquisition.

 

Categories: Updates

Leadership lessons from Brian Chesky

July 17, 2015 Leave a comment

I typically do not read much about the CEOs of tech startups. A big reason is that I live in the Silicon Valley and most CEOs are building the company with an exit strategy. So there isn’t much to learn from them.

Although this piece on Brian Chesky and how he has learned to run AirBNB is a superb read. It is full of leadership lessons that will take years to get, if you are lucky to have a chance to experience it. As Munger says the best way to learn is to learn from other’s mistakes. This article will give you key leadership approaches that even a MBA program won’t be able to teach. A great read for anyone that is in leadership positions or interested in it.

Categories: Reading