Five years ago, Dynasil Corporation (NASDAQ:DYSL) was trading at a similar level to what it is today. The company, a developer of optical components used in a number of end markets, had executed a number of acquisitions to grow its business rapidly. As a result, the Dynasil's share price appreciated considerably.
Dynasil's shares peaked in October 2010, just before the company found itself in trouble. A number of products produced by DYSL's Instrumentation Segment required expensive refreshes as they reached the end of their useful life. These products included the Lead Tracer, the XRF Lead Paint Detector and the Navigator Probe. The Lead Tracer was discontinued, while the remaining two products cost far more than anticipated and were released outside of their initial timetables. This put the company in a financial bind as expenses grew and sales shrunk. As a result, revenues dropped considerably, profits became large losses and the company defaulted on its credit agreement with Santander Bank, all causing the stock price to plummet to under $1/share in January 2013.
To remedy the situation, the Dynasil made a number of changes, including putting its optics companies and RMD Instruments segment up for sale. Without having to sell any of its optics companies, DYSL sold everything associated with its XRF Lead Paint Detector (to PROTEC Instrument Corp. in Nov. '13) and Navigator Probe (to Dilon Technologies in Dec. '13) product lines. These sales resulted in payments of $1.2 million and $2.75 million to Santander Bank, which greatly reduced the company's indebtedness.
With its debt situation under control, Dynasil refocused its efforts on its remaining major business segments: contract research and optics. Since the fiscal year ended on September 30, 2013, revenues from each of these segments grew 4% and 18% respectively. These increases have just about offset the revenues lost in the sales of the instrumentation product lines. Sales have only decreased 2% year-over-year during the nine months ended June 30, 2014, despite a $3 million drop in instruments sales over that period.
What's more, Dynasil has returned to profitability, growing its margins in the remaining two major business segments. The contract research segment reported an operating margin of 3.9% for the nine months ended June 30, 2014, compared to 1.6% for the same period last year. The optics segment reported an operating margin of 8.2%, compared to 3.4%.
As a result of Dynasil's improving financials, the share price has appreciated considerably, moving from a closing low of $0.47 on May 16, 2013 to a closing high of $1.85 on June 23, 2014--a 294% increase. Despite this recent run, the company's stock price still has more room to move, as it is undervalued for a few of reasons:
- The company's recent acquisition of DichroTec Thin Films will allow Dynasil to increase its operating capacity, adding to its revenues. Just how much remains yet to be seen, but CEO Peter Sulick believes the new facility will contribute a couple million dollars in additional revenues per year. This new facility will also allow the company to free up its large 108-inch coating chamber by offloading some of the scheduled work into the acquired facility. This acquisition should be accretive six months after the acquisition was completed.
- Dynasil has an untapped intellectual property portfolio, containing around 50 patents, which have been granted over the past four to five years. Sulick noted that there are another 50-55 pending. As of now, the company has not actively tried to monetize this vast portfolio although they do have a few licensing deals. However, Sulick stated, "The marketplace is looking good for materials that we have the patents for," when I spoke with him over the phone in early July.
- DYSL has a very small biomedical segment that could contribute considerably to the company's financials in the future. This segment consists of spin-off, Xcede Technologies, which DYSL owns 90% of. According to Sulick: "Xcede Tech has a sealant that it has five patents on that has retained an interest although Dynasil is no longer funding it. Over time, the value of that technology is going to be significant." So, with no overhead costs by way of funding, DYSL could capitalize on these budding opportunities.
Some may argue that Dynasil has already appreciated considerably, and is thus no longer undervalued. However, DYSL's value is more long-term than its recent stock appreciation. Dynasil has turned its financials around and shareholders were rewarded for the company's success in doing so. While turning its financials around, the company has shown the ability to grow revenues while reducing costs, something management believes it will continue to do. The company's prospects (its recent acquisition, its extensive IP portfolio and its stake in Xcede Technologies) should lead to further revenue growth. If margins hold or increase as revenues grow, the increase sales will drop through to the bottom line.
Quite a bit remains yet to be seen as Dynasil attempts to regain its former stock market glory. However, the company is well on its way under a management team that has returned DYSL to increasing revenues and earnings, and decreasing debt. Meanwhile, the company is a bargain, trading at around $1.70/share.
Disclosure: The author is long DYSL.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Dynasil was recommended by The Bowser Report in June 2014.
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