Eric Sprott of Toronto’s Sprott Asset Management explained why he thinks the market is underestimating growth in Sensio Technologies (OTC:SNIOF) [SIO:CN]. Key excerpts follow:
Turning to a non-commodity idea, why do you consider Sensio Technologies [SIO:CN] a potential homerun?
ES: Sensio is a small Montreal-based company with patented technology that facilitates the transmission and broadcast of 3-D content using 2-D devices and infrastructure. It provides encoding technology for minimal or no cost to movie, television and videogame producers creating 3-D products, and then charges a per-unit royalty for the decoding technology used in televisions, game consoles, DVD and Blu-ray players, set-top boxes, personal computers or any other playback device.
We expect 3-D to proliferate at a tremendous pace in all media platforms over the next few years and Sensio has what is considered the market-leading technology to help make that happen. We’ve seen research that estimates the total potential royalty-generating unit shipments of applicable PCs, TVs, game consoles and other devices could reach nearly 1.2 billion units per year within the next three or four years. At even tiny penetration levels, that would translate into huge revenue and profit growth for Sensio. Profit margins in royalty-type businesses like this tend to be in the 70-80% range or greater.
With revenues today nearly non-existent, this seems almost like a venture capital investment.
ES: I told you we look for the biggest bang for the buck. For its fiscal year ending in May 2012, assuming 3-D-enabled devices continue to increase rapidly for theater and home markets and Sensio slowly starts to build market share, revenues could come in at C$13-$14 million, with EPS in the 14-15 cent range. As new content and hardware feed off each other, growth could accelerate from there, sending revenues over C$40 million in fiscal 2013 and EPS to around 50 cents per share.
If all that happens, that’s not bad against a share price of around C$1.70 today.
ES: A lot obviously has to go right for the company to hit those numbers, but the upside if they come even close is massive. A company growing like that in a field with open-ended growth certainly isn’t going to sell for 3.4x earnings.
For comparison, Dolby Laboratories and DTS – companies in the industry with similar royalty revenue models but much lower growth – today trade for something like 20x 2011 EPS estimates. Put that multiple on 50 cents per share in earnings and, even if it takes longer than we expect, Sensio would be a homerun.
How are you looking at downside risk?
ES: There’s not as much downside protection in this idea versus a gold stock trading at 5x earnings. Here we have to look out a number of years until the multiple gets cheap. The compensation for less downside protection, of course, is that the upside is potentially explosive.
We also see the real potential that someone recognizes the value of Sensio’s technology and tries to buy the company. We have no precise estimate for a takeout price, but if the technology is what we hope it is, any deal would surely only happen at a significant premium to today’s market price. That could help put a nice floor on the share price.