Since we live with a market that just won’t stop and I can’t seem to find much of value (in fact I have a fair bit of cash on hand), I thought I would collect some thoughts on a position I already have.
Omni-Lite Industries manufactures precision components. The components are small and range from small valves for a automotive transmission to parts to a gun used by the military. The manufacturing is done by using computer controlled cold forging machines.
Cold forging in and of itself is not a competitive advantage. Anyone can get capital and purchase the machines and train (or hire already trained) technicians. When times where good OML was earning 15-20% ROC with Ebitda margins usually between 30-40%. Pretty good, but the cash conversion cycle (CCC) is long. Like 300-400 days long. Yikes.
Revenues have grown from around 3 million in 2003 to a peak of 8.5 million in 2008 to sit at 5.4 million TTM. Ebitda margins went down the toilet as the product mix has suffered.
Couple the above division mix with operating performance and you can see why OML has fallen on hard times.
The lack of revenue from the military division the main culprit as margins where very high in that division.
What attracts me?
The company did a share offering at $2.15 at the start of 2011. The intent was to use the cash to build out capacity for the military and automotive division. While the auto division is still humming along, the military division is a few quarters away from being non-existent (if the current trend persists). Since the offering and the share price retreat the company has bought back around 7% of shares outstanding (at lower prices than the shares were issued) and pays a dividend. There is still 2.5 million in net cash on the balance sheet to use if demand in the division returns.
There have been some developments on the military front. The company will submit a component for first article approval soon (or may have done so over the last few days).
The company is trading at around 0.50x book and the lowest EV/Rev in the last 10 years. It is quite easy to spot that expectations are low.
I’m not going to speculate on what OML could do. I am comfortable enough with the valuation and the management team that the downside is limited enough to take a position here.
Disclosure: The author is long shares of OML.to.